CBN’s push for better exchange rate management (1)


Godwin Emefiele

THE ongoing crisis in the management of Nigeria’s exchange rate is nothing but unending. Apart from massive corruption which has giving room to huge foreign capital flight from the economy, the exchange rate-shocks could more be attributed to the volatility presently rocking the global fall in oil revenues, which no doubt, accounts for the country’s 80 per cent source of income.

The neglect of the agricultural sector, the mining sector, poor infrastructure development among others has not helped matters either. Presently, N199 exchanges for as low as $1 at the official market rate while it sells for N220 to $1 at the unofficial market rate


This has, in no small measures, affected the country’s dwindling external reserves that has plummeted over the period to a mere $30.62 billion as against $60 billion in 2008 when the exchange rate was put at N116 to the $1.

Determined to give the nation a way forward, it appears the nation’s apex bank—the Central Bank of Nigeria recently woke up from its slumber to arrest the ugly situation and if possible, reposition the country’s Forex regime mechanism.

As at moment, the CBN sees a much stronger naira even as it applauds the commercial banks’ rejection of Forex deposits, the apex bank is currently beaming more light on Bureau de Charge otherwise known as BDCs.

Speaking at a recent forum in Abuja, the CBN Director of Monetary Policy, Moses Tule said that the apex bank was upbeat about the naira finding its true value within the shortest possible time and strongly supports the latest decision by banks to stop further receipts of foreign exchange cash deposits from customers to reduce huge idle cash in their vaults.

Tule insisted that there was no going back on the new FX policies since recent developments showed that the naira, which was almost heading to N250 to $1 was only artificially driven by speculators to make more gains stressing that the apex bank would beam more light on Bureau de Change where naira speculation had thrived. “We are going to take the foreign exchange policy far because the government supports what the CBN is doing in this respect, we did not direct the banks to stop accepting dollar cash deposits from customers, but we supported what they are doing.”

Delivering a paper titled: “Exchange Rate Management: Evolution of the Nigerian Foreign Exchange Market’’ at the last seminar for financial journalists in Calabar, the Chief executive Officer (CEO), Financial Derivatives Company Ltd, Bismarck Rewane traced the history of exchange rate regimes from one era to the other. “1821-1914, Classical Gold Standard, where worlds currencies were redeemable in gold, 1915-1925, was the era of WW1 ‘Dirty Float’, 1926-1931, came the Interwar Gold-Exchange Standard, 1932-194, was Pre-Bretton woods floats even as the period from 1945-1971 witnessed the times of the Bretton Woods Agreement and the Age of the Adjustable Peg.”

According to him, from 1972-1973 saw the Smithsonian Agreement, 1974-1979 came with the Floats in the west & Adjustable Pegs in the Developing World, while from 1980-the present day came the European Exchange Rate Mechanism, Euro system.

Rewane explained without equivocations that the determinants of the value of a nation’s currency includes, inflation differential, interest rate differentials, exports of goods and services, terms of trade, current account deficit as well as the tax haven status among others.

Also highlighting the history of the Nigerian foreign exchange market from 1960-1986 Rewane noted: ‘’Between 1960-1980, Nigeria shifted from a fixed regime to a pegged arrangement, then in pre-1973, Nigerian currency was not a traded currency, it was subject to administrative management, exchange rate was largely passive and dictated by the fortunes of the GBP or USD where the naira was pegged to GBP until 1967 when the pound was similarly devalued thereafter, pegged to the dollar.”

In all Rewane stated that in the last 10years, the naira had declined from N130/$1 to N199/$1 representing 50 per cent stressing that presently, a fiscal crisis has led to a monetary crisis adding that the outlook for the naira is full of uncertainties. “Bank of America projects a 10 per cent devaluation to N220/$ by end of 2015 while Rencap projects a value of N235/$ in the next six -12 months even as the EU thinks the naira will be N225/$ by 2016 and N233/$.”

Answering question on whether Nigeria was having currency crisis, the versatile economists said: ‘’Yes, Nigeria has a currency crisis, because the price and value of the naira are at tangents, poor timing of currency adjustments have prolonged currency crisis, subsidies (exchange rate and fuel) are major sources of leakages, fuel subsidy constitutes 30 per cent of Nigeria’s import bill, remove subsidies, aberrational demand pressure will disappears and reduce imports bill of bogus demands by 15-20 per cent.”

He disclosed that this was the best time for Nigeria to remove the oil subsidy from the petroleum sector to allow the nation’s economy finds its level with the aim of increasing the nation’s foreign reserves for the economy to bounce back to life once and for all adding that the present level where oil subsidy is taken the country large chunk of its revenue was not healthy for the economy.

This he said had continued to show negative signs occasioned by the continued slides in the world oil market. “Removal of subsidy is the only panacea to economic growth’’ Rewane added that with subsidy retention constituting 30 per cent of Nigeria’s import bills, the current policy modification by economy planners might not yield the desired result.

He further warned that if fuel subsidy were not dealt with, policy modification would not yield desired result. “Fuel subsidy constitutes 30per cent of Nigeria import bills.

Remove subsidy, aberrational demand pressure disappears,” he noted He said that Nigeria being an oil dependent economy, the volatility of oil prices at the international market could trigger off dual issue of resources and management problem.

Earlier, the CBN Director of Corporate Communications, Ibrahim Muazu who represented the CBN Governor, Godwin Emefiele at the event harped on the need to organise the seminar at such a time so as to acquaint the public on the issue of the dwindling global oil prices and its effects on the country’s economy. “It has become imperative to direct our attention to this topical economic issue considering your role in enlightening and educating the general public with regard to measures that have been taken by the relevant authorities in dealing with the challenges of managing the country’s exchange rates and external reserves,” he said.

In his contributions, the Director, Reserve Management department of the CBN, Lamido Yuguda noted that the growth of an economy amidst a sound financial and political environment attracted foreign investments, brought with it, its attendant benefits.

Thus, sustained capital inflows above outflows cushion the effect of foreign exchange demand as confidence is established in the financial system and the strength of the economy.”

Yuguda explained that for a sustained level of inflow, especially FDI, which is more productive, an economy must possess strong economic fundamentals. ‘’Nigeria was able to attract all types of foreign capital before the 2008 global financial crisis due partly to robust level of reserves, only FPI flow was sustained at a higher level after the crisis.”

He recommended that in order to attract more direct investments that are seen as more stable and less speculative, the country must, therefore, develop the requisite infrastructure for the growth of the real sector.

Security of lives and properties must also be among the top priority of government, there is the need to diversify the sources of foreign exchange earning in order to address the dominance of the oil sector, the National Sovereign Investment Authority  (NSIA), should be strengthened through more funding in order to establish fiscal buffers that will improve the country’s credit rating.”

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