“The way the exchange rate was managed limited access to FX and thus adversely affected investor confidence and investment appetite,” the World Bank.
The Central Bank of Nigeria (CBN) ran a really brilliant, in my opinion, exchange rate playbook just before 2016. The apex bank kept the exchange rate around N197/$ for years after it moved from around N157/$. They created and deployed tools, using the basic economic framework: if you improve supply, keeping demand constant, price will fall. But here, at least, the price will stay constant. Magically, businesses were not worrying over exchange rate as they curtailed the movement within an optimal equilibrium point.
But starting in 2016, the apex lost its mission. It began a season of rascality and that old nuanced movement vanished. They discarded what was actually working, and many bad things started happening. Of course, many would blame the fall of crude oil and the mild recession. Nonsense. For you to know that it has nothing to do with crude, put the graph of crude oil and the exchange rate volatility in Nigeria, you will see that the correlation is not strong since 2016. If the correlation is strong, at least, since the oil price stabilized by being perpetually down, it ought to have stopped crashing.
For a long time, Nigerian naira has been under the fearful trio of massive speculation, fear of devaluation and high demand. Add the economic apocalypse of three exchange rates depending on your status in the society – official rate, IEFX (I&E Foreign Exchange Window) and the black market rate – you see confusion.
So, it is not a surprise that the World Bank is blaming CBN for the current forex crisis. The World Bank thinks that CBN mismanaged the foreign exchange regime and that mistake is what we are paying for in the fall of Naira against major global currencies: “According to the World Bank, the central bank’s management of the exchange rate reduced supply in the market thus affecting investor confidence and ultimately leading to a ditch of the official market for the black market.” That is very blunt and I do hope the CBN pays attention.
Sure, we are not saying that the World Bank is a high priest which knows it all. But one thing I know is this: the current state of the Naira is not giving many people confidence to ship money from the US to Nigeria. People want stability in a currency before they can buy stocks, treasury, etc so that when you exit and have to return the funds back to America, your hands would not be burnt.
“In May 2021, the CBN formally took concrete steps towards rates unification between the official and IEFX rates. However, the IEFX rate continues to be managed and is not fully reflective of market forces. Furthermore, there remains a 20 percent premium between this unified rate and the parallel market rate. The two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020—that mandated all licensed operators to pay remittances in dollars. While this may indeed encourage the use of the formal channels, it is not clear that incentive payments will increase remittances to the country,”
“While the CBN has taken steps towards operationalizing unification of exchange rates, greater flexibility will be necessary to support the recovery. Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX. In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX.
With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment. The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations.”
People, this is evident: if confidence is low on your currency, speculation rises and bad things happen. What brings low confidence? That is what the World Bank refused to touch in that report! I expect CBN and the government to search their economic hearts!
Meanwhile, World Bank has revealed that inflation has pushed about seven million Nigerians below the poverty line in 2020 alone: “According to the report, the rise in inflationary pressure has been driven primarily by surging food prices, as Nigeria’s rate of inflation rose steadily throughout 2020 and reached a four-year high in March 2021.” That is something the government needs to fix.---
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