CPPE advocates flexible FOREX regime to fix shortage
The Centre for Promotion of Private Enterprises (CPPE) has again urged the Central Bank of Nigeria (CBN) to adopt a flexible exchange rate regime to end forex shortage and fix naira devaluation.
In a note signed by its CEO, Muda Yusuf, analyzing the economy of the country in the first quarter of the year, the Centre reiterated its proposition that it is high time the country adopted a flexible exchange rate policy regime.
Yusuf identified benefits of a flexible exchange rate model to include enhancement of liquidity in the foreign exchange market; reduction of uncertainty in the foreign exchange market and therefore enhances the confidence of investors; and more transparency as mechanism for forex allocation.
Other gains of the a flexible exchange rate regime, according to the centre, include elimination of discretion in the allocation of forex; reduction of opportunities for round tripping and other sharp practices; enhancement of the credibility of the foreign exchange market; and reduction in the multiplicity of exchange rates.
This suggestion followed the sharp and increasing currency depreciation in the parallel market that remains a cause for concern.
Yusuf described this as a trend that should not be allowed to continue, adding that all necessary steps need to be taken urgently to stem the slide and volatility.
“It is as much of a concern to investors and consumers as it is to producers and other stakeholders that create value in the economy. It calls for an urgent review of the current foreign exchange policy.
“The current rigid stance of the CBN on the foreign exchange policy is hurting investors, creating distortions and retarding the recovery prospects of the Nigerian economy. For most businesses, the parallel market is now the default foreign exchange market,” Yusuf said.
While he clarify that the exchange rate regime is not a call for currency devaluation, he explained that rather; it is a pricing framework that reflects the demand and supply fundamentals.
“It is a model that is sustainable, predictable and transparent. It would reduce uncertainty and inspire the confidence of investors. It would minimize discretion and arbitrage in the foreign exchange allocation mechanism,” he said.
Devaluation on the other hand, he explained, is a policy choice often adopted to boost export and discourage imports.
According to him, countries adopt this measure, not necessarily because they have a foreign exchange or balance of payment crisis; but as deliberate trade policy strategy to make their exports cheaper.
How fixed exchange rate regime affects Nigeria
On the other, Yusuf said a fixed exchange rate regime creates unfavourable outcomes including the following:
- Widening gap between the official and parallel market exchange rates creating room for roundtripping and associated malpractices.
- Collapse of liquidity in the foreign exchange market resulting in acute scarcity.
- Mounting trade debts.
- Increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs.
- Many investors are not able to meet offshore obligations.
- Mounting inflationary pressures
- Sharp drop in capital inflows
In the light of the foregoing, the Centre further recommended certain policy options to fix the current forex crisis in the short to medium term.
- Adoption of a flexible exchange rate regime. This would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence.
- Deepening the autonomous foreign exchange market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational Companies, Donor Agencies, Diplomatic missions etc. Market rates should be allowed to prevail in the autonomous window.
- Accelerate reforms to boost private investment in domestic petroleum refineries to stop the current massive forex outflows for the importation of refined petroleum products.
- Fix the structural problem in the economy to enhance regional and global competitiveness of Nigeria products in order to boost exports and strengthen import substitution.
- Incentivise investment in the gas sector to take advantage of the current crisis in the global energy market. We have one of the largest gas reserves in the world.