A private sector policy think-tank, Agora Policy, has called for the inclusion of forex and monetary policies as part of a comprehensive economic plan.
In a report entitled: ‘Steadying Nigeria’s Fledging Foreign Exchange Reform,’ Agora Policy said that successful fixed-to-floating transitions are characterised by certain key features, one of which is a clear role for exchange rates within the context of a broader economic strategy that must be entertained.
It also said that exchange rate serves as a tool for export diversification and for attracting capital flows to foster overall development
‘‘The exchange rate is a key input variable within the context of an economy, as it serves as a measure of relative prices between a country and its trading partners. The long-stated objective of Nigeria’s policymakers is to diversify its export base, which, given Nigeria’s labour abundance, distills to ensuring that industrial activity is geared towards the production of exportable goods that use a lot of low-skilled labor that is abundant in Nigeria.
‘‘To ensure export competitiveness of these non-oil exports, exchange rate policies must look to deliver an extra layer of competitiveness to export prices in a form that favours domestic industries. To this end, the goal of policymakers on FX is not nominal exchange rate stability but real exchange rate stability with an undervaluation bias,’’ Agora Policy said.
It also pointed out that Nigeria’s FX policy must look to ensure a balance between real exchange rate stability that ensures non-oil export competitiveness and keeps inflation at a level supportive of domestic welfare, adding that Nigeria’s economic managers must explicitly seek to achieve this balance and must demonstrate annually how their policy measures or adjustments deliver on these goals.
‘‘The best example here is Singapore, where the central bank is required to publish annually how it goes about delivering a balancing FX policy within the twin objectives of trade competitiveness and low inflation,’’ it said, adding that Nigerian authorities must change the CBN Act with explicit references to the CBN to demonstrate how, via its policy actions, it ensures real exchange rate competitiveness and stable prices via reports published bi-annually.
In creating a workable FX market architecture, the Policy said that Nigerian policymakers must envision a distinct set of supply forces, i.e., multiple FX sources, which can be attained by removing all forced sale rights on oil exports presently held by the CBN. Essentially, it believes that credible FX reform will end the forced Petro-dollar to Naira conversions financed via the printing of new money.
While advocating consistent focus on price stability, the Agora Policy charged Nigeria’s central bank to have an explicit inflation targeting framework with clear annual and intermediate inflation targets that are publicly known and must annually demonstrate how its policies achieve this objective.
Advising on institutional mechanisms for hedging volatility, it states that: “Beyond developing deep and liquid spot markets, concerted efforts must be on including avenues for hedging without any arcane restrictions that look to curb speculation. The CBN should work with exporters and financial institutions to develop the means for importers to hedge against FX volatility risk to prevent demand front-loading. Nigeria should work actively to ensure that the large USD flows (including remittance flows) equilibrate within the official segments.”
Preaching clear framework for FX interventions, it said: “Market failure is a feature of still-forming markets, and Nigerian policymakers must be clear-eyed to have a system for dealing with periods when markets become volatile. Thus, there must be a clear operational framework for dealing with periods of external shocks which should include providing temporary US liquidity, interest rate adjustments, communication, and FX adjustments.”
Beyond these broad medium-to-long-term objectives, it urged policymakers not to ignore the near term.
“To stabilize the present spiral, Nigeria needs a big stash of dollars and fast! Policymakers must look to strike while the iron is hot to avoid reform fatigue by seeking out sources of large USD liquidity on concessional terms by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10 billion) with the objective of acquiring credibility.
“Having front-loaded fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyze increased capital flows. While this is politically tricky, desperate times call for bold and desperate measures. The global geopolitical environment means Nigeria has a window to obtain this funding if it is ready to push the envelope.
“These dollar flows are necessary to give the market ‘time to breathe’ as, left unsolved, the Naira could come under fresh speculative pressures which might drive a return in policymakers towards the very pegged arrangement they recently jettisoned.
“The CBN must look to be flexible in thinking: there are several variants of flexible FX regimes and we should be pragmatic to not rule out any options. The goal is to ensure that FX adjustments reflect the trends in the balance of payments in a credible manner over the near and medium term,” it pointed out.
