While the Central Bank of Nigeria (CBN) is of the opinion that the temporary exchange rate regime in the country can solve current problems as well as the long term need for inflation, the International Monetary Policy Committee (IMF) thinks otherwise.
“Countries with multiple exchange rate have lower growth and higher inflation. A more flexible exchange rate in a reform scenario in Nigeria could boost Gross Domestic Product in the medium term,” IMF said.
Recall that in June 2019, the central bank reiterated that there has not been any change in Nigeria’s exchange rate structure.
Making the clarification at the Special Policy Dialogue Colloquium, organised by the Financial Derivatives Company (FDC) on Monday, the Senior Special Assistant to CBN Governor, Emmanuel Ukeje, said the development has severally been clarified, except that people have chosen to go with misconceptions.
He said the nation’s apex bank is not practicing multiple exchange rates, but multiple windows due to the country’s peculiar situation.
“We (Nigeria) can move from 11percent to 9percent and then to 6percent (Inflation). The temporary exchange rate regime that seeks to achieve the long run term need of inflation can solve current problems,” Ukeje explained.
According to Godwin Emefiele, the CBN governor, the Naira was exchanged at N525 to a dollar before it introduced the I&E exchange window in 2017, adding that the initiative coupled with other interventions by the CBN helped to forestall further currency depreciation as projected.
The industry regulator said when it started its various interventions; the exchange rate began to drop. “It got to N360, which at that time, we thought it was close to the real effective exchange rate and we said we must begin to buy the reserves,” Emefiele said.
Although the stable exchange rate of the naira against the US Dollar comes with a huge monetary cost.
The CBN’S 2018 Annual Activity Report revealed that the apex bank increased its liability by 250 percent from N16 trillion to over N40 trillion within three years, about 34 percent of this amount, almost N14 trillion, represented Open Market Operation (OMO) securities which were issued to manage liquidity.
This implies that in order to maintain the desirable, and high value of the naira over the last three years, the CBN increased its liability to over N40 trillion, mainly through the issuance of OMO securities.
“This does not only represents a threat to the same currency the bank seeks to protect but also exposes the wider economy to several risks,” Lanrewaju Rufai, a Lagos-based Finance and Strategy Analyst said.
Businessday analysis of the CBN’S OMO bill data revealed that for the seven month to July 2019, the apex bank has issued OMO bill to the tune of N9.97 trillion, starting from January 3rd, 2019 to 4th of July.
Economists have referred to Nigeria’s exchange rate structure to be a managed float system.
In a fixed exchange-rate system, the value of one currency is tied to another, while a managed float exchange rate regime, the central bank is allowed to influence a country’s exchange rate direction during price fluctuation by buying or selling currencies.
