Unifying the exchange rate

IN compliance with one of the conditions attached to the $3.4 billion Rapid Financing Instrument from the International Monetary Fund (IMF) for the purpose of addressing the severe economic impact of the Covid-19 shock and hamstrung by the sharp fall in oil prices as well as the reduction in Diaspora remittances, the Central Bank of Nigeria (CBN) recently unified the naira exchange rate around the Investors and Exporters (I&E) market-determined foreign exchange window also known as Nigerian Autonomous Foreign Exchange (NAFEX).

Prior to the CBN’s foreign exchange rate convergence move, Nigeria had four different exchange rates; the CBN official rate, Investors’ and Exporters rate, Secondary Market Intervention Sales (SMIS) rate and the parallel market rate, with the difference between the official and parallel market rates being sometimes as high as N150. This made growth impossible and inflation inevitable because multiple exchange rates result in high cost of production and create distortions in the economy. The immediate benefit of rate unification to the government is that it will boost naira returns to the Federation Account Allocation Committee (FAAC) from foreign exchange inflows, especially now that the committee is battling with dwindling revenue from crude oil sales. Many states are already at their wits’ end on how to manage their meagre earnings from FAAC, given that they have to contend with extra-budgetary spending on the containment of Covid-19 spread. So, the liberalisation of the naira exchange rate is good news to both the president and the governors.

But beyond that, foreign exchange rate unification will engender rate stability, stimulate investors’ confidence in the country’s economy and also boost local production, which has the capacity to increase the Gross Domestic Product as well as create employment opportunities. If properly managed, it will eradicate rent-seeking and put an end to round-tripping, a system through which those who access the dollar and other foreign currencies at a lower official rate from the CBN turn round to sell same for premium arbitrage to those who need them for productive purposes. However, given the obvious benefits, the question arises: why did it take the monetary authorities so long to arrive at this decision? Why did the government have to vacillate till the country’s industries became anaemic while those living on foreign exchange rate arbitrage had grown fat before toeing this path? The government should know that a good decision delayed till a wrong time is as bad as a wrong decision.

Now that the government has decided to liberalise the naira exchange rate, it is important to stress that there should not be any sacred cow that would be considered for other rates under any guise. Sauce for the goose is sauce for the gander. The easiest way to tie the country’s economy to some people’s apron strings is to give them special concessions which are denied others. The favoured groups would prosper at the expense of the rest and lord it over the majority. That happened under the old regime; it should not be permitted any longer.

A unified foreign exchange rate transformed the Indian economy and helped Cuba to grow. So, we are convinced that this policy has the capacity to improve not just the economy but also the citizens’ standard of living. However, that is predicated on its being allowed to flourish and not deliberately made to flounder. Therefore, we call on the CBN to refrain from every temptation to succumb to policy somersaults. It must  not go back to the old way which made billionaires of a few, boxed the country into a bottomless borrowing pit, rendered the manufacturing sector prostrate, and pauperized the majority of the citizens.

 

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