Following the accelerating free-fall of the naira that has compounded Nigeria’s forex crisis, Nigeria’s Vice President Yemi Osinbajo has asked the Central Bank of Nigeria (CBN) to allow market forces to determine forex rate.
The Vice President said this on Monday during a speech at the Midterm Ministerial Performance Review Retreat which was held at the Banquet Hall, Presidential Villa, Abuja. He noted that Nigeria’s official exchange rate is “artificially low”, asking the CBN to rethink its strategy in tackling the forex crisis.
“As for the exchange rate, I think we need to move our rates to be more reflective of the market as possible. This, in my own respectful view, is the only way to improve supply. We can’t get new dollars into the system when the exchange rate is artificially low. And everyone knows by how much our reserves can grow.
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“So I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink. All those are issues, I’m sure, that when the CBN Governor has time to address, he will be able to address in full,” he said.
Last month, the CBN accused an online forex rate aggregator, AbokiFX, of manipulating parallel market prices to the detriment of the naira. The apex bank had vowed to go after the media outlet, forcing it to shut down the forex rates publishing aspect of its business.
However, the development has changed nothing in the Nigeria’s forex market. Currently, the exchange rate remains $1/N570 and above in the parallel market, though the central bank’s rate remains N410.
Experts have pointed at insufficient dollar liquidity as part of the reasons the naira is depreciating. Data from the CBN shows $116 billion to be the total dollar inflow to Nigeria’s economy in 2020, which compared to 2019’s $142 billion and 2014’s $160 billion, has 20% and 30% drop in dollar inflow to the economy respectively. The drop in oil prices, which is Nigeria’s dominant source of revenue, is largely responsible for dollar scarcity in Nigeria. There is also the massive drop in diaspora remittances as people switch to cryptocurrency for cross-border transactions.
However, like Osinbajo, experts have advocated that the CBN allow market realities to determine naira’s fate. Last month, former CBN deputy governor Kingsley Moghalu, said the financial regulator should stop subsidizing the naira.
“As I have said before, and say again, we have two options. One is to let the Naira find its level in the market. In order, words, the central bank should stop subsidizing the currency. While there will likely be an immediate spike in the price of the dollar, this move will have two advantages. The first is that, because Nigeria has a big, profitable economy and market, dollars will likely swamp the market seeking profits for investors. When this happens, the laws of demand and supply will work in favor of the Naira. Alongside this, maintaining different exchange rates for different kinds of transactions must end. This is called rate convergence,” Moghalu said.
With many voices calling on the central bank to change its forex regulatory approach, as every measure it has taken so far has failed to yield the needed result, all eyes are on the governor, Godwin Emefiele, to make a shift from the status quo. However, there is a strong belief that removing the naira’s subsidy will amount to further depreciation reflecting Nigeria’s current economic situation.