CBN Urged to Liberalise Forex Market

Chinedu Eze

Former Director-General of the Lagos Chamber of Commerce and Private Sector Advocate, Dr. Muda Yusuf, has urged the Central Bank of Nigeria (CBN) to suspend the pegging of exchange rate so that the market would determine the value of the naira.

Speaking on ARISE News Channel, the broadcast arm of THISDAY Newspapers, Yusuf said CBN’s intervention was discouraging suppliers of foreign currency, and had become a disincentive to export as well as hurting Foreign Direct Investment (FDI).

Yusuf said for CBN to stem the free fall of the naira, it has to deal with the fundamentals of the market, which has to do with supply and demand, but currently, instead of treating the ailment, it is rather concentrating on the symptoms by trying to control the demand of forex.

He said the major challenge forex is facing is inappropriate pricing of the exchange rate and the gap in the window between the parallel market and the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX), which officially pegged the dollar at N420.

According to the economist, “You don’t have to fix a rate in the market which cannot be supported by demand and supply. The gap between the parallel market and NAFEX window is about 30 per cent, which is big. It could be managed if it is about five to 10 per cent. The major demand is on the parallel market because NAFEX window can only meet about 20 per cent of the demand. The high demand is putting pressure outside the official window. So it is like subsidy, which cannot work, so we should deal with the fundamentals of the problem. If we don’t deal with the cause of the problem and continue to treat the symptoms, we create greater problem for the economy.

“By fixing the rate, CBN is blocking free supply to the economy because those who are willing to supply to the market will not do so when the rate is pegged. Apart from oil, we have FDI, we have embassies and the Diaspora that can supply foreign currency to the market. What are we doing to encourage them to supply to the market? People are doing business under the table because CBN fixed a rate that is not sustainable. There is premium of 30 per cent between the official and parallel market. This regime is creating the problem. We are doing fractioning.

“If you have a system that functions well, CBN cannot be selling forex because it should be sourcing its own forex. The critical factors of demand and supply, if well managed, will create incentive for people who want to bring in forex. CBN should allow a system that works. You can never win when you are confronting the market. One of the major problems in the market is the insistence that people should sell at a fixed rate. That policy has created a problem of compliance.”
Yusuf recommended that CBN should engage stakeholders “because nobody knows it all,” noting that it will be difficult to attract foreign investment to the economy with distortion in the forex market; “so the NAFEX policy needs to be reviewed.”

On whether CBN would convert domiciliary account in the banks, he said that the idea is speculative “because CBN had announced that it would not do so,” and noted that if such is done, the effect would be very damaging and would “collapse the confidence in investing in the country”, adding that Nigeria has structural issues that are discouraging competitiveness in the economy.

Yusuf also spoke about AbokiFX, and said the CBN seemed to be looking for scapegoat because the company does not have the power to jolt the market as alleged by CBN.