Between Exchange Rate Convergence and Structural Reforms


Addressing structural challenges in the economy is pivotal in achieving exchange rate convergence and effective monetary policy transmission, writes Obinna Chima

The issue of exchange rate convergence in Nigeria was brought to the fore at a recent policy dialogue forum.
At the event organised by the Financial Derivatives Company Limited (FDC), officials from the International Monetary Fund (IMF), the Central Bank of Nigeria (CBN) as well as some other notable economists, expressed their views on Nigeria’s exchange rate policy as well as how best to take advantage of the recently signed continental trade deal.

The event was entitled: “Policy Change – The Enabler of Sustainable Growth.”
The CBN Governor, Mr. Godwin Emefiele, recently restated the Bank’s commitment to continue to defend the naira, saying that the CBN Act demands that the Bank “defends” the naira using the foreign exchange reserves.

“In effect, the CBN would be disobeying the law establishing it, if it sits idly by and allow the naira to be determined wholly by the so-called market forces.

“Second, those who call for floating of the currency betray their wilful ignorance of the effects of significant depreciation, however short-lived, on inflation.

“Several empirical analyses have shown that the pass-through of changes in the exchange rate on consumer prices is almost one-to-one. This implies that for every percentage point depreciation in the naira, there is almost the same rise in inflation,” he had explained.
The CBN Director, Corporate Communications, CBN, Mr. Isaac Okoroafor, had also reaffirmed the bank’s commitment towards ensuring stability in foreign exchange market.

The Debate
But speaking at the FDC forum, IMF’s Senior Resident Representative and Mission Chief for Nigeria Amine Mati, called for a review of the country’s exchange rate policy.

The IMF chief said: “Countries with multiple exchange rate have lower growth and higher inflation. A more flexible exchange rate in a reform scenario in Nigeria could boost Gross Domestic Product in the medium term.”
Speaking further, Mati said: “If government wants to subsidise fuel, it should not be by selling forex at cheaper rate, but
it should be bold enough to put the cost of the subsidy in the budget”.

According to him, exchange rate unification should be a policy-driven decision of the government.
“Multiple exchange rates have different implications across different countries in the world. We have analysed the situation in Sub-Saharan Africa and have noticed that each country is able to succeed as a result of the policies that have been put in place to counter challenges.

“The IMF’s policy has been consistent on this issue, such that, we advise for the unification of exchange rates and the
CBN and Economic Recovery and Growth Plan are already working in this direction to ensure that the country has a unified exchange rate,” he added.

However, in reaction, the CBN Director, Monetary Policy, Mr. Moses Tule, said unifying the exchange rates could trigger another spike in inflation and called for structural reforms.

He said policies of the central bank had helped calm inflation from over 18 per cent, which it was a couple of years back.
He said advanced economies had in the past administered a stream of incentives to critical sectors of the economy in form of subsidies, adding that there was need to put in place requisites infrastructure and make things correct before removing multiple currency practices.”What is wrong if we give preferential treatment to the importers of oil so that they get oil at a certain exchange rate N305, and then deliver it to Nigeria at a certain price so that it does not extend or transmit into inflation?
“We had the shock on inflation in 2016 and it was not driven by monetary forces, it was triggered by three key factors. There was a change in the oil price; there was repricing of electricity tariff and there was the depreciation of the currency.

“All these fed the inflation. So, if we had inflation rising up to 18 per cent it was not driven by monetary factors but was driven by reform factors, which were necessary for the economy.

“If we have a temporary exchange rate regime that seeks to achieve the longterm target of inflation, it can solve current problems because monetary policy solves the current problem and in the long run we expect that fiscal policy will address the structural issues.
“IMF tells us that because of multiple currencies practices there is trade deficit, there is high inflation and slow growth. It means slow growth comes as a result of exchange rate misalignments; it means inflation is because of exchange rates misalignments it means structural deficits is because of exchange rate misalignments.

“In 2012, the IMF said in the midst of the global financial crisis the IMF agreed that going forward there is a need to look at countries relative to the condition in which those countries are, but now that we are out of the crisis, the IMF have gone back to the textbook economics.
“How long ago did the Fund when we introduced the 41 items say this is not acceptable and we had a running battle with the IMF but eventually they had a recourse and said ok we have agreed that you have made some major and we agreed and said we can do better and we are working towards doing much better,” Tule added.
Also speaking, CEO Economic Associates and
former member, Economic Management Team, Dr. Ayo Teriba, said by focusing on
exchange rate and talking about multiple exchange rates, “we missed the point fundamentally.”
“Both the CBN and IMF are chasing shadows by talking
about exchange. Multiple exchange rates are symptoms of the problem. The
problem is dollar supply shortage,” he added.
To the Managing Director/Chief Executive Officer, FDC, Mr. Bismarck Rewane, Nigeria needs structural reforms that can boost efficiency in sectors where the country has competitive advantage. Rewane also advocated for a
unified exchange rate regime.
But the Special Adviser to the CBN Governor on Financial Market, Mr. Emmanuel Ukeje, reiterated that the central bank does not currently have multiple exchange rates, but multiple exchange rate windows.
Ukeje said: “We have made this clear that we don’t have multiple exchange rate, we have multiple windows.
“We have seen N340/$, and nobody has bordered to ask. Those rates are forward rates, not spot rates. If you get N340/$ at the SME window to be delivered in six months, you are getting it at N360/$ if you put it together.”
The policy, according to him, was arrangement to take care of the sectors that naturally would not be serviced by the banks.

AfCFTA as Growth Enabler
Vice President Yemi Osinbajo, who was at the forum, said the African Continental Free Trade Agreement (AfCFTA) would make Nigeria an investment hub for Africa, spur growth in the economy and increase exports by eight per cent.
According to him, despite signing the agreement late, the federal government is earnestly addressing issues that could hamper Nigeria’s growth, adding that the agreement will enhance export of semi and fully finished goods.

Osinbajo was represented by the Senior Special Assistant to the President on Industry, Trade and Investment, Dr. Jumoke Oduwole.
Osinbajo said: “The AfCFTA can transform Nigeria from a target economy to the gateway economy by boosting job creation through increased intra African trade and spurring growth through enhanced economic welfare with an estimated eight per cent increase of Nigeria’s total export.

“In spite of the fact that Nigeria only just signed the AfCFTA, in terms of readiness, we are not at ground zero. At $35.45billion, Nigeria’s manufacturing value-added, a measure of a productive capacity to produce and export semi and fully finished goods, is about seven times more than the current average for the top 20 African countries. This suggests Nigeria’s productive capacity is at a higher level than that of most African countries. However, as an administration, we are well aware that there remains a lot to be done.
“The concerns raised by some Nigerian stakeholders about the risks with the AfCFTA are not without merit. Even prior to the agreement, the policy thrust of this administration had identified and focused on many of these priority areas in the competitiveness pillar of the Economic Recovery and Growth Plan (ERGP 2017-2020) directly speaks

to the hard infrastructure challenges as well as the reforms required to deliver an enabling business environment for businesses operating in Nigeria to thrive under its competitiveness pillar initiatives since 2016.”

He added that the provision of adequate, stable and uninterrupted power for businesses is central to Nigeria’s AfCFTA readiness just as the country is moving in the right direction with the implementation of the Power Sector Recovery Plan (PSRP).

“Only recently, Mr. President signed a power agreement with Siemens that will significantly ramp up Nigeria’s power generation to 25,000MW by 2025. As this is being accelerated, we are intensifying efforts towards positioning the private sector to utilise 2,000MW of stranded power under the eligible customer (willing buyer-willing seller) declaration.

“Our energising economies’ initiative is also supporting the rapid deployment of offgrid electricity solutions to MSMEs in economic clusters such as markets across the country – Ariaria in Aba and Sabon Gida in Kano to mention a few- shopping complexes and agricultural and industrial clusters.

“In addition to power, other infrastructure gaps in the areas of sea and airports, railways and broadband are being accelerated.
“The completion of the various transport infrastructure projects will continue to receive adequate priority from this administration. For example, the Lagos-Ibadan section of the Lagos-Kano standard gauge line is nearing completion; the Abuja-Kaduna section has been in operation for the last two years.

“We are committed to the construction and rehabilitation of the Lakaji and the Port Harcourt to Ngala corridors, as well as their connecting and feeder roads. We have also taken steps to revitalise the decades old Inter State Road Transit Scheme (ISRTS) by releasing some of the required counterpart funding to Nigerian Export-Import (NEXIM) Bank in 2017.

“Our ports must, as a matter of urgency and necessity, become more efficient in expectation of increasing trade volume. With the National Trading Platform, we are implementing a single window portal and installing scanners at the seaports in a view to limiting physical examination of containers that has lengthened cargo clearance time.

“Consistent efforts are also being made to unlock traffic congestion around Lagos port facilities, as well as implementing the NIMASA’s Deep Blue Project for improved maritime security,” he stated.

On dumping, he said the problem was being addressed through “the use of trade remedies anti-dumping and countervailing measures that allow governments to take actions against injurious trade practices by foreign countries and companies. To adequately tackle this threat will require collective support at the highest level of ECOWAS and the Africa Union and Nigeria is looking forward to this cooperation, particularly from our neighboring countries.”