Move Towards Exchange Rate Unification Positive, Says FSDH

0 16

A report by the FSDH Research has described recent move by the Central Bank of Nigeria (CBN) to achieve exchange convergence is positive, saying it would ensure clarity and improve market confidence in the economy.

The report also stated that the move would enable Nigeria to unlock funding from several multilateral organisations such as the International Monetary Fund (IMF) and the World Bank and ease the pressure on the exchange rate in the medium term.

It further stated that the central bank’s current move towards unified exchange rate was expected to ensure flexibility and market- determined rate, which it stated to a large extent would, reduce arbitrage, round-tripping and could move the naira towards its fair value.

“The CBN’s move is expected to instill confidence in the market as foreign investors are more likely to participate in a less fragmented market that can be fairly predictable.

“Given this framework, the options available for the CBN include raising the interest rates to incentivise inflow of capital into the economy that may hurt economic recovery in subsequent quarters or relax capital control rules/restrictions and simultaneously increase market interventions to prevent significant depreciation of the naira that may result in external reserves depletion,” the report stated.

It, however urged the CBN to follow up the move to unify the exchange rate with a set of consistent forex policies that would seek to improve market liquidity and prevent every form of foreign exchange arbitrage and unnecessary subsidies.

It also urged the CBN to clear forex backlogs, which the IMF estimated to be $2 billion in February 2021, to further instill confidence in the market.

The report, which was titled “Nigeria’s Foreign Exchange Policy Note- Navigating through the Tides of Uncertainty,” adding that: “As much as Nigeria needs effective management of foreign exchange and unification of exchange rate to boost confidence, the supply shortage of foreign exchange is still a major problem.

“Increasing foreign exchange supply from non-CBN sources is vital in maintaining exchange rate stability in the I&E window and reducing speculative activities.”

The report predicted that the CBN would be faced with, “policy trilemma” to explain Nigeria’s foreign exchange and monetary choices.

The ‘trilemma’ refers to the trade-offs a government faces when making crucial monetary policy decisions because only two out of the three objectives could be achieved at a time.

It added: “With COVID-19, Nigeria maintained the two objectives of having a fixed/managed official exchange rate and monetary autonomy at the expense of free movement of capital. This was evident in the capital controls and forex backlogs.

“The recent move by the CBN to adopt the I&E market rate as the official rate will enable the CBN to control interest rate while capital controls can be relaxed, but exchange rate will have to be flexible.

“Whether the naira appreciates or depreciates will depend on the level of capital inflows and outflows, CBN’s involvement in the market and the external reserves position.

“This means only way to maintain a stable exchange rate is to attract even more capital into the economy or intervene heavily in the forex market using the external reserves.”

It added that the planned issuance of Eurobond by the government would provide some relief in the market and boost external reserves in the short term.

However, from the fiscal and trade perspective, “Nigeria will need to leverage on the African Continental Free Trade Area (AfCFTA) agreement to boost non-oil exports and increase foreign exchange inflows.”

The FSDH also recommended that, “providing direct incentives for businesses to produce for exports by implementing port reforms as well as developing a comprehensive industrial and trade strategies would be important steps that the government must take.

“Our 2021 forecasts for key indicators include real Gross Domestic Product (GDP) growth of 1.3 per cent, an average exchange rate of N430/$ and an inflation rate of 16.6 per cent.”

– Thisday

Leave A Reply

Your email address will not be published.

%d bloggers like this: