Lagos, June 14, 2023 -Dr Muda Yusuf, a financial expert, on Wednesday described the new floating foreign exchange system introduced by the Central Bank of Nigeria (CBN) as a welcome development.
In a statement in Lagos, he described the CBN’s initiative as a bold step by the Tinubu administration toward the unification of the naira exchange rate.
Yusuf, who is the Director of the Centre for the Promotion of Private Enterprise (CPPE) in Lagos, said the liberalization of the foreign exchange market would unlock the huge potential for investment, jobs and capital flows, while investors’ confidence would be positively impacted.
He, however, clarified that this is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.
Yusuf, also described the current arrangement as a framework which allowed for flexible rate adjustments as and when necessary.
“It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors.
“It would minimize discretion and arbitrage in the foreign exchange allocation mechanism.
“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10%
“A unified exchange rate regime offers the following benefits for the economy:
“It enhances liquidity in the foreign exchange market and reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors.
“It is more transparent as mechanism for forex allocation and minimizes discretion in the allocation of forex and reduces corruption vulnerabilities.
“It reduces opportunities for round tripping and other sharp practices and It would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation.
“It would boost government revenue by a minimum of N4 trillion through additional remittance of exchange rate surplus to the federation account by the CBN.
“The use of naira cards for limited international transactions would be restored in the short to medium term and would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on inflation outlook.
“It would deepen the autonomous foreign exchange market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational oil companies, diplomatic missions etc”.
Yusuf said the erstwhile foreign exchange policy regime was for all practical purposes, a fixed exchange rate regime that created the following distortions and negative outcomes in the economy:
“Widening the gap between the official, other multiple windows and parallel market exchange rates which created room forex roundtripping to flourish.
“It caused the collapse of liquidity in the foreign exchange market resulting in acute forex scarcity and fueled demand for forex because of the incredible rent opportunities created by the huge parallel market premium.
“It created a major disincentive for forex inflows into the economy, thus suppressing forex supply and mounting trade debts.
“It Increased factory closure as many manufacturers were not able to access foreign exchange for raw materials and other inputs as many investors were not able to meet offshore obligations, creating credibility problems with their offshore suppliers.
“It also surged inflationary pressures and caused drastic drop in capital inflows
“Meanwhile, it is important to reiterate that this is not a devaluation policy, it is a normalization of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply.
“It would be dynamic; and the naira will appreciate or depreciate depending on the fundamentals.
“In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalizes and moves towards equilibrium, the rate would moderate.
“We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence.
“The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market,” he said. (GBN)
