Lack of flexible exchange rate policy causing distortions in the economy – LCCI

The Lagos Chamber of Commerce has said that the lack of a flexible exchange rate policy is causing distortions in the economy and causing a misalignment between rates and demand and supply.

The Central Bank of Nigeria has pegged the naira at N197/$1 while in the open market rates go as high as N350 to a dollar. Analysts say this has provided arbitrage opportunities in the currency market and causes misalignment between the rates and the fundamentals of demand and supply.

The impact of the government’s policy on the foreign exchange is seeing flight cancellations, industries laying off workers due to inability to import raw materials, companies failing to meet obligations relating to international trade transactions and scaring off investors who can’t see the logic of bringing their funds into an economy where the bank insists they exchange at a rate far lower than the open market.

“No economy can exists in isolation of other economies, you have to relate one way or the other with other economies internationally and you cannot do that if your foreign exchange market is not liquid and it cannot be liquid if there is a misalignment between the exchange rate and the fundamentals of the market,” said Muda Yusuf, director general of LCCI.

He indicated that the policy is not sustainable and will only harm the economy more. “The truth is that this policy is not sustainable, we have seen a country like Venezuela that adopted this model, their economy has virtually crashed and the earlier we fixed this, the better for everybody.

“There will be some pains but at least there will be a stability in the system because of this policy the inflows of foreign exchange that should come from autonomous sources are now coming because how do you bring your funds to an economy where the banks will insist that you have to exchange your inflow at 197 when they know that it is over N300 in the open market. This is a big impediment to inflows impediment to supply.”

Analysts have called for urgent action to review Nigeria’s foreign exchange to reflect market realities and have decried the apex bank’s fixation with curbing inflation growth at the expense of economic growth.

In terms of our discussion with the central bank, they are more concerned with curbing inflation trajectory, rather than addressing economic growth”, said Yvonne Mhango, Sub-Saharan Africa economist at Renaissance Capital.

Capital controls have continued to discourage investors from bringing in much needed investment into the country, it is also setting in capital flight.

Nigeria’s stock exchange lost N1.2 trillion in Q1 2016, one of the worst performances in Africa. It opened the year at N9.50 trillion, representing -12.5 percent decline compared to N8.62 trillion posted April 30. All Shares Index, ASI which opened at 28,642.25 points, slumped by 3,579.84 basis points to close at 25,062.41 points.

 

Isaac ANYAOGU