For years, the World Bank and the International Monetary Fund (IMF) have been mounting pressure on the Central Bank of Nigeria (CBN) to maintain a single exchange rate policy. However, Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN), has often responded by insisting that Nigeria cannot afford to operate a floated exchange rate system.
In January 2019, Mr. Godwin Emefiele had, during a press briefing after the meeting of the Monetary Policy Committee, warned that to float the naira would plunge the economy into further crisis. But the IMF and the World Bank have maintained their pressure for the CBN to do their bidding. Emefiele, once again, stuck to his guns when he made it clear that Nigeria will not adopt the floating forex policy at this year’s IMF/World Bank Spring Meetings in Washington DC, United States.
Emefiele argued that different countries were facing diverse economic challenges and must develop a framework peculiar to their economic situation.
He said, “Both the IMF and World Bank are our prime development banks, and we have received support from them at different times in resolving some of our economic challenges, particularly bordering on finance.”
“Nigeria’s situation is very peculiar and that is why we have continued to engage the IMF and World Bank to show understanding of our local problems. Yes, they want us to freely float the exchange rate and you do know that this will have some impact on the exchange rate itself in the sense that when you allow that to happen, you will have some uncontrollable spiral in the country’s exchange rate.”
Emefiele stated that the high demand for forex on certain goods, which drains Nigeria’s foreign exchange, was what forced the Federal Government to suspend access to forex exchange for the importation of over 40 items. In defending the CBN’s decision, he said, “We cannot be accused of not adjusting the currency, but we have to be given the time to ensure that while we are looking at the exchange rate, we have to do something about demand and supply, as long as the demand for forex exceeds the supply, the crisis of having access to forex will not go away.
“We are trying to adopt a gradual approach to make sure that those things that we can produce at home are produced at home instead of importing them. That means that the demand for FX will reduce and the currency will be better priced to meet the expectations of Nigerians.”
Emefiele also told them in Washington that “we are doing everything possible to restructure the base of the economy through some of the policies that we have put in place to deepen the production of goods in Nigeria.”
Back home in Nigeria, some economic experts have taken it up to defend the CBN’s decision not to float the Naira. Prof Ken Ife, Lead Consultant, Industry and Private Sector Development of the ECOWAS Commission told The Nation that, “the IMF and World Bank are not monetary and fiscal advisers to the Federal Government of Nigeria. Their mandate is to restate the obvious international best practices.”
He argued that “the reality is that countries have different challenges. The mismatch between forex supply; and forex demanded for export is divergent making it difficult to reach equilibrium. As our crude oil accounts for about 80 percent of forex revenue and vulnerable to exogenous shocks, Foreign Direct Investment (FDI) is weak, foreign portfolio Investment is problematic, Diaspora remittance and increased borrowing is inevitable, at least to service foreign dollar denominated loans.
“The structural factors at play are compounded by insecurity, infrastructural deficiencies, making it difficult and suicidal to float the Naira. Doing so in the current circumstances will have naira spiral out of control,” he said.
Prof Mike Obadan, a member of the Monetary Policy Committee (MPC), explained that “what the proponents of foreign exchange market deregulation (IMF and World Bank) are advocating is what economists call a clean float exchange rate system in contrast to the managed float system that the Central Bank of Nigeria (CBN) has operated for quite some time.
“In a clean float system, the government or monetary authority does not intervene in exchange rate determination to establish its level or maintain a given rate. Rather, the exchange rate at any time is determined by the interaction of the market forces of supply and demand for foreign exchange. The monetary authorities trust the market to manage the exchange rate which can change from day to day or even minute to minute.”
Prof Obadan added that “the fact that the government does not intervene in the market implies that no official foreign exchange reserves will be necessary. Besides, since all private foreign exchange transactions will be cleared through the market, there will be no balance of payments deficits or surpluses that would require official settlement. This is where the challenge is as what is portrayed here is not the case in practice. Balance of payments deficits/surpluses do occur and official settlements with reserves do take place.”
However, under a managed float exchange rate system as practiced by the CBN, Prof. Obadan stated that “the government intervenes in the foreign exchange market (through the use of interest rate and/or foreign exchange supply) to influence the exchange rate to a desired level. Considering the effects of exchange rate fluctuations on trade and domestic inflation, governments seek to intervene in the forex market in the hope of moving the exchange rate in the appropriate direction.
“When considered against reality, it is clear that the clean float exchange rate system is academic as it hardly exists anywhere in the world. Even if the government intervention is not overt, it may be done covertly. Importantly, the industrialized countries including those whose currencies are convertible, practice floating with different degrees of government intervention. And so, the CBN’s managed float system is in sync with other countries, perhaps, in different degrees.”
The MPC member went to say that “one thing that needs to be appreciated is that the CBN has not been operating a fixed exchange rate system as some analysts would want to believe. Rather, the Bank has operated a market-based managed float exchange rate system, the latest variant of it being the Investors and Exporters (I &E) foreign exchange market that was introduced since April 2017 to boost liquidity in the foreign exchange market and ensure timely execution and settlement for eligible transactions as stipulated by the CBN.”
He explained further, “The I & E exchange rate is the official exchange rate for investors, exporters and end-users. In the I & E market, foreign exchange is traded (sold and bought) based on prevailing market conditions. Once in a while or periodically, the monetary authority intervenes in the market with supply to ensure stability of the exchange rate. The market is currently functioning under the difficult challenge of limited forex supply in relation to very high demand.”
Responding to why the exchange rate is not stable with the current high crude oil prices, Prof Obadan stated that “the answers are straightforward: first, is that the country’s oil production is limited and much lower than the OPEC’s relatively low quota of 1.72 mbpd because of scandalous crude oil theft and secondly, heavy importation of refined petroleum products. Crude oil production reduced from 2.07 mbpd in quarter 1, 2020 to an average of 1.31 mbpd in 2021 due mostly to oil theft and difficulties in some oil terminals.”
Reports he said “indicate that crude oil thefts in 2021 reached 200,000 barrels per day – a quarter of onshore production – and currently about 500,000. Stolen oil volumes have cost the country over $ 3.3 billion.”
Prof Uche Uwaleke of Nasarawa State University, Keffi, is Nigeria’s first professor of Capital Market and the President of the Association of Capital Market Academics of Nigeria. He said the implication of a floating forex regime “can better be imagined. It will certainly lead to capital flight, lead to massive depreciation of the currency and ultimately to currency crisis in Nigeria and I think we should all know that it is a road to perdition to ever go in that direction.”
Proponents of naira float he said have always argued that by implementing a complete float, the true value of the naira will emerge leading to the convergence of the official and parallel market rates. A unified exchange rate, which is one attribute of a well-functioning forex market, finds theoretical support in its ability to respond to market forces, reduce market distortions and encourage foreign investments in the long run.
Unfortunately, Prof Uwaleke said, “Nigeria has a peculiar case: the interplay of market forces in the forex market, lopsided in favour of demand, can only result in a very high equilibrium price. Even if currency floating solves the problem of multiple pricing and arbitrage; it does not address the liquidity challenge.
“Because the country imports fuel, raw materials, food and virtually everything, commodity prices will hit the roofs from pass-through effect of high exchange rate and the CBN will be compelled to further tighten monetary policy. Granted that government revenue will increase from the naira value of oil exports, but the cost of servicing government’s huge domestic debt will also surge following increased yields on government securities. What is more, a higher exchange rate resulting from naira float will also make the servicing of foreign debts more expensive.
“Further, huge sums will be needed to implement capital projects contained in the budget which is dollar-dependent. A unified exchange rate is capable of increasing the pump price of fuel and accelerating inflation. So, a naira float will not only increase the cost of fuel subsidy but also widen the fiscal deficit in the budget.”
A reluctance to float the naira, on the part of the CBN, he said “is largely informed by these considerations as well as by the pursuit of the primary objectives of exchange rate policy in Nigeria which are ‘to preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.”
Drawing from the Egyptian experiences of 2016, Prof Uwaleke said that in November 2016, the government of President Abdel Fattah al-Sisi yielded to pressure from the IMF to float the Egyptian pound as pre-condition for accessing a US$12 billion three-year loan. “Expectedly, after receiving the first tranche, Egypt’s foreign reserves jumped to US$23.1 billion at the end of November 2016 from US$19.1 billion a month earlier, according to the Central Bank of Egypt. Although the gap between the official and parallel market rates narrowed considerably, it was at a very high price: from a pegged exchange rate that had the Egyptian pound officially trading at EGP8.8 to the dollar, the Egyptian pound bled so much that a few days after its floatation, it officially traded at EGP17.8 per dollar compared to EGP17.98 per dollar in the parallel market. A report by Bloomberg named the Egyptian pound as Africa’s worst performing currency in 2016 chiefly because ‘the nation took the dramatic step of allowing it to trade freely in an attempt to stabilize an economy struggling with a dollar shortage.”
Till date, the country is still reeling from the spillovers of that action. According to Prof Uwaleke, “what is clear is that the relatively diversified economy of Egypt and the IMF support facility helped to cushion the destabilising effects. On the contrary, the defective structure of the Nigerian economy and the fact that the country is not seeking any loan from the IMF should make floatation a scary option for the CBN. Any attempt to float the naira now will spell doom for an economy still recuperating from the devastating effects of several months of negative output growth.”
