TUE 05 APRIL, 2022-theGBJournal| According to the Centre for the Promotion of Private Enterprise (CPPE), a private sector advocacy and economic think tank, the sharp and increasing currency depreciation in the parallel market remains a cause for concern.
‘’It is a trend that should not be allowed to continue and all necessary steps need to be taken [and urgently too] to stem the slide and volatility,’’ the think tank said.
The Centre expressed this view in their first quarter (2022) economic review which focussed on key developments in the Nigerian economy and which also highlighted the implications of these developments for investments and the economy.
‘’These developments should not be ignored,’’ CPPE urged, ‘’It is as much of a concern to investors 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.’’
According to the CPPE, ‘’the current rigid stance of the Central Bank of Nigeria (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.’’
CPPE proposes that Nigeria should adopt a flexible exchange rate policy regime and says this is not a call for currency devaluation. 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.’’
Devaluation on the other hand, is a policy choice often adopted to boost export and discourage imports. 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.
The benefits of a flexible exchange rate model are as follows, it enhances liquidity in the foreign exchange market, it reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors, it is more transparent as mechanism for forex allocation and it eliminates discretion in the allocation of forex.
In addition to these, it reduces opportunities for round tripping and other sharp practices, it enhances the credibility of the foreign exchange market and leads to reduction in the multiplicity of exchange rates.
A fixed exchange rate regime on the other hand creates the following outcomes:
-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
The CPPE suggested the adoption of the following 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 strenghten 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.
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