Lagos Chamber of Commerce and Industry (LCCI) has advised the Federal Government to adopt a flexible forex regime in order to ease the liquidity crisis in the forex market and improve its allocation efficiency.
This system, Muda Yusuf, director-general, LCCI, believes will assist to manage the forex scarcity.
Explaining that flexible exchange rate is different from devaluation, Yusuf argued that flexible exchange rate would allow rate movement, depending on fundamentals. “The flexible exchange will create liquidity in the forex market, it will make planning easier for investors and it will encourage more inflows in the system,” he said.
“Devaluation is a policy to boost export. It is not necessarily because there is a forex crisis. “When China devalued, it was not because there was forex crisis, it was because they wanted to boost export. Japan also did it. Other countries have also done it. It is a trade policy strategy. But a flexible exchange regime we are advocating is to improve the allocation efficiency.”
Yusuf believes that the system would alleviate the difficulty investors face when they come in at official rate and when they want to go out, they are told there is no forex by their banks. “The system is transparent, it may cost more but it will not cost as we are witnessing in the parallel market,” he said.
On the restrictions of forex to possibly checkmate excess foreign consumption, Yusuf believes that government can check excess foreign good consumption with tax policies. Government can employ fiscal policy tools, such as tax policy to shape behaviour of investors. “That is why those tools are there. If you want to encourage or discourage investor, there are things you can do.
“In the tariff book, there are items that carry up to 50 percent levy, apart from the normal duty. This is to support or penalise some sectors. Machinery is zero percent duty; there is reason for it. Rice at some point was 120 percent duty – 100 percent duty and 20 percent levy to encourage local production, but after some pressures it was reduced. Fiscal policy measures are easier to deal,” he said.
Assessing the business environment, the director-general said it had been characterised by a lot of uncertainty. “The level of investors’ confidence has declined considerably and profit margins are falling,” he observed.
Many businesses are closing shops, especially those in production, he said, and that those that have not closed shops are in the verge of doing so.
According him, prices are rising and inflation pressures are increasing. For investors, they are not exactly sure the direction government wants to go few months after taking over government. “As we speak, even though we have had couples of policy pronouncements in the medium-term expenditure framework in the budget, still a clear direction has not been properly articulated. The kind of reforms we were expecting to see at the beginning of the administration we are yet to see, especially in the oil and gas sector,” he said.
To him, the power sector that was privatised and the subsequent reforms seem not to be delivering the expected outcomes as consumers are complaining about the quality of delivery of power and “we all know how strategic power is to the development of a country like Nigeria”.
He recognised the global oil price that declined, which has a lot of ripple effect on the economy, government revenue, exchange rate among others, but the response of the CBN to the declining of crude oil price and the scarcity of forex seem to have compounded the problem. “The problem would not have been as much as we have if the policy responses have been right,” he said.
