Need for CBN to unify Nigeria’s multiple exchange rates
... Absence of single rate creates confusion, discourages investment
The road to Nigeria’s economic success and property isn’t an easy one. It requires tough and bold policies along the way. These policies, expectedly, may hurt the same households or citizens the government seeks to protect.
However, foregoing medium to longer term benefits of critical reforms in the guise of protecting Nigerians will only postpone the country’s and its citizens’ days of misery.
Daily, the reluctance of the Central Bank of Nigeria (CBN) to collapse the country’s multiple exchange rates grows stronger despite recommendations from the International Monetary Fund (IMF) and experts on the importance and benefits of a unified rate.
Although the CBN devalued the naira to N381/$1, this is not in any way market-determined. At this rate, experts believe the naira is largely overpriced and should reflect the rate in the parallel market.
Due to increased pressure in the demand for dollars, the naira has weakened significantly in the parallel market against what the official CBN rate is quoting. At N470/$1 as at last week Friday, naira is trading at 20.9 percent differential to the CBN’s official quote. This is worrisome given the adverse effect this will have on the economy.
We are not unaware that CBN is working extra hard to paint a fairy picture of the naira contrary to the view of reputable institutions that the naira is overpriced. The apex bank is in denial that a devaluation is inevitable and is upbeat about its ability to do such that devaluation mongers will wait in vain.
International oil prices seem to be recovering from the COVID-19 pandemic-induced slump on the back of improved demand for oil. This is coming on the heels of gradual reopening of economies, fuellingCBN’s ability to defend the naira. But, in our opinion, the sustainability of defending the naira is questionable given the volatility of the oil market.
CBN’s refusal to unify the exchange rates suggests that some individuals known to the CBN are benefiting from the official rate which isn’t accessible to everyone. We consider this unprofessional and it questions the transparency of the CBN. It also sends a wrong signal to foreign investors. For clarity and investment purposes, a unified rate is not only advisable but also helpful and desirable.
For an economy starved of foreign investment and which must attract capital to achieve growth, clarity in the FX space is critical. While we advise the federal government to shift its strategy from a debt financing model to an equity financing model, the possibility is unlikely if the CBN is unwilling to take the bold step in unifying its multiple exchange rate windows.
This must be followed by fiscal complementary efforts of diversifying the economy through market moving and friendly policies that will attract foreign capital and make them stay in other viable sectors of the economy.
As long as crude oil remains the major export of Nigeria’s foreign trade and it is denominated in dollar, the dollar will always strengthen against the naira, most especially with the country’s huge import level.
Importation of goods into Nigeria creates a market for dollar-demand whereas the exportation of goods does not lead to Naira demand, thus creating an imbalance that puts pressure on exchange rate.
Foreign investors, IMF and World Bank have long called on Nigeria to merge its multiple exchange rates, saying the absence of a single rate creates confusion and discourages foreign investment. The CBN must take this seriously and put an end to its obsession with protecting the naira.