16 Aug 2023
Agora Policy Proposes Strategies for FG and CBN to Stabilize Foreign Exchange Market
In response to the recent depreciation of the Nigerian naira, Agora Policy, an influential think tank based in Abuja, has put forth a comprehensive framework for both the federal government and the Central Bank of Nigeria (CBN) to consider in order to stabilize the fluctuations in the foreign exchange (FX) market.
In a recent report titled "Steadying Nigeria's Fledgling Foreign Exchange Reform," financial analyst Wale Thompson advocated for a fresh approach to FX policy. Thompson noted that Nigeria has experienced a series of unsuccessful attempts to transition to a flexible exchange rate system and suggested that a new strategy be adopted, integrated into a broader macroeconomic plan, and executed with appropriate timeframes.
Thompson cautioned against solely relying on FX adjustments to adapt to market realities, as this approach often leads to temporary gains followed by a return to past practices. He argued that a more comprehensive approach is needed, where forex and monetary policies are seamlessly integrated into an economic plan that leverages exchange rates to facilitate export diversification and attract capital inflows, ultimately promoting overall economic development.
The report outlined key features of successful fixed-to-floating transitions, highlighting the need for a broader market, highly liquid markets, a consistent focus on price stability, increased transparency, clear communication, and a well-defined framework for FX interventions.
Thompson emphasized that Nigeria's long-standing objective of diversifying its export base necessitates policies that enhance the competitiveness of non-oil exports. He proposed that exchange rate policies should aim to provide an additional layer of competitiveness for export prices, favoring domestic industries. This balance between exchange rate stability, non-oil export competitiveness, and manageable inflation is crucial for promoting domestic welfare.
To establish a functional FX market architecture, Thompson recommended multiple FX sources by removing forced sale rights on oil exports held by the CBN. He also suggested that the CBN should purchase dollars like other market participants, thereby managing naira liquidity in line with its monetary objectives. Thompson proposed that the federal government should separate CBN control over development finance banks and capitalize these entities to support underserved sectors in the credit market.
Thompson stressed the importance of improving information about FX demand and supply trends, and advocated for enhanced transparency in FX markets. He urged collaboration between the CBN, exporters, and financial institutions to develop mechanisms for importers to hedge against FX volatility risk and prevent excessive demand front-loading. Thompson further recommended that Nigeria ensure the equilibrium of significant USD flows, including remittances, within the official segments of the market.
The policy analyst called upon the CBN to maintain a flexible and pragmatic mindset, considering various options within the realm of flexible FX regimes. As the CBN announces its plans to implement new measures to stabilize the naira against the dollar, Thompson's suggestions offer a comprehensive strategy for addressing the challenges of the current FX landscape.
