Experts, analysts at loggerheads over exchange rate consolidation amidst fear of global headwind

ANALYSTS AND EXPERTS ALIKE have failed to reach a consensus over the CBN’s multiple exchange rate regime, with many calling for a consolidation of rates, just as many are also standing strongly against the consolidation amidst increasing global economy fears.

Nigerians have become increasingly wary of the government’s foreign exchange management policy as a looming global trade meltdown may lead to problems with foreign exchange inflows and bring about hard economic hardship if the Central Bank of Nigeria (CBN) does not make up its mind of taking the tough choice of consolidating the country’s exchange rate windows soon.

The CBN’s sustained effort at supporting the value of the naira through weekly or bi-weekly supply of foreign exchange creates a unique challenge for foreign exchange management. The CBN stands in the position of a money supplier of a commodity with several buyers, the standard economic outcome is that the price of the commodity would be higher than if more suppliers existed in the market, in other words, the monopolist can dictate either the price or the quantity of FX available but not both.

Speaking on the subject, Asimiyu Damilare of GTI research, regarded the multiple exchange rate regime as a “good evil”, adding that while the regime has helped stabilize the exchange rate and has also helped with reducing inflation, however, the policy is also weighing on foreign investors interest in the Nigerian market. Asimiyu stated that the economy is ripe for consolidation but doubted the CBN would go down that route.

Asimiyu said, “I will describe the current multiple exchange rate regime in Nigeria as “good evil”. This is because, while the multiple exchange rate regime has continued to weigh on foreign investors interest in the Nigerian financial market and real sector performance, the regime, on the other hand, has helped the monetary authority (the CBN) to move closer by the day, towards achieving its dual macro objectives of single-digit inflation and exchange rate stability. Hence, the CBN may not reverse the multiple exchange regime any time soon given that it also aligned with the interest of the present government to manage the Naira exchange rate against the U.S. dollar.

”Its already ripe to unify the exchange rate now. But if you understand the body language of the CBN governor, such development is not in the offering in the near term. While I’m not in support of running a multiple exchange rate regime in Nigeria on the grounds that it has continued to drive up the exchange rate cost of the real sector operators, those who import raw materials at N360/$1 as against the official rate of N306/$1 and whittle-down gains of foreign investors, the policy seems inevitable for Nigeria at a time like this when the country is yet to fully recover from the effect of 2014 - 2016 economic downturn, mainly caused by the sharp collapse in the price of the country’s major foreign exchange earnings - Crude oil. Thus, with Nigeria still a net importer of refined peTHE troleum products and many manufactured goods, the CBN may continue to manage the exchange rate in order to keep the inflation rate down,” he added.

On the team that is against consolidating the exchange rate is Nkiru Okoisor, fixed income trader at UBA, who stated that there is no need for the CBN to be jumpy about the happenings in the global economy, she added that the multiple exchange rate worked magic in the past and since the CBN has made stability the corner of its policy and the monetary authority still have enough legroom in the form of foreign reserve to keep the naira stable.

Okoisor said, “if we are being honest, the innovation of the multiple exchange rate is one of the Central Bank’s best policies because of the effect it had in stabilizing the economy when the naira was out of hand, I am not saying that we should continue with this in perpetuity, but the CBN should hang on to the policy that has helped bring about the stability that they want, more so, the foreign reserve still gives the CBN enough legroom to maneuver in the foreign exchange market”

Bola Arowoyehun, a professor of public sector economics at Babcock University, stated that the primary concern of the economy should be liquidity and not consolidation of rates. He advised that if the country could increase foreign exchange supply, the multisystem will fade out.

Arowoyehun argued that the rigidity of forex supply is what brought about the large spread in rates.

The professor said, “You see, the country’s primary concern, should be liquidity and not consolidation. I believe that with more foreign exchange in supply, arbitrage opportunities gradually disappear and the tiered exchange rate structure will naturally disappear.”

“The large spread in rates reflects supply-side rigidities. Therefore, increasing FX supply should bring about lower rates in both markets and eliminate the need for multi-tiered rates as presently exist,” Arowoyehun added.