Foreign Exchange Market Nigeria Dollar To Naira

Why CBN Should Adopt Flexible Exchange Rate Policy – CPPE

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The Central Bank of Nigeria (CBN) should adopt a flexible exchange rate that will allow a pricing mechanism strategy that reflects the demand and supply fundamentals in the foreign exchange market.

The Centre for the Promotion of Private Enterprise (CPPE), made the call in its 2021 review of the various policies that were introduced by the CBN as the year wind down.

One of such policies was the removal of the Bureau De Change (BDC) operators from the foreign exchange value chain. The apex bank diverted the weekly forex for BDCs to financial institutions with forex licence, the policy was filled with mixed reactions.

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While some hailed the CBN policy, a few others said it was a move by the Godwin Emefiele-led management to fix price, some financial analysts said CBN was manipulating the forex market by using the official exchange rate that doesn’t reflect what is obtainable in the parallel market.

On the need for a flexible exchange rate, the economists at the CPPE said its advice shouldn’t be misconstrued as a “devaluation proposition” but a model that is sustainable, predictable and transparent.

The body of economic experts stated that the flexible exchange policy regime would reduce uncertainty and inspire the confidence of investors.

6 Benefits of Flexible Exchange Rate Market

  1. It increases investors’ confidence
  2. It enhances liquidity in the forex market
  3. It ensures a more transparent model for forex allocation
  4. It minimises discretion and arbitrage in the foreign exchange allocation mechanism.
  5. It dynamic and able to cope with changing demand and supply conditions in the forex market.
  6. It liberalises inflows from export proceeds, diaspora remittances, multinational companies, donor agencies, diplomatic missions among others.
Also Read:  No Longer At Ease With The Naira, 1USD Now N532 At Parallel Market, Who Should We Blame?

Review 40 Items That Can’t Access Forex

Some time ago, the CBN listed some items that can’t access foreign exchange in a move to boost local production of such items and in November 2021, launched a “100 for 100 Policy on Production and Productivity (PPP) to boost local manufacturing.

But the Centre for the Promotion of Private Enterprise, said the apex bank should have a rethink over the policy in order to save the Nigerian currency which has lost value since the CBN started rolling out some of its forex policies.

CPPE advised that if CBN needs to improve dollar liquidity to rescue the naira and help industries to grow and expand. It stated that the current policy is negatively affecting investors and stakeholders in the manufacturing sectors.

It states in a statement, “Some of the products on this list are intermediate products for some manufacturing firms which have negatively impacted some manufacturers. It would be advisable for the CBN to have a robust engagement with the stakeholders to review this list in the New Year.”

CBN CRR Policy Preventing Banks from Playing Financial Intermediation

On the Cash Reserves Requirements imposed on financial institutions in Nigeria, CPPE described as high and a financial burden on the banks.

It stated that Nigeria’s CRR is the highest in the world, with some of them having CRR of 50 per cent, against the official CRR of 27.5 per cent.

“Yet, financial intermediation is supposed to be the major function and essence of the banking system. The high CRR has made it difficult for the banks to play their primary role of financial intermediation. Their profitability is also adversely impacted because of limited room for credit creation activities.

“Indeed, the ways and means finances of the apex bank pose greater liquidity risk to the economy than bank deposits. We, therefore, seek a reduction in CRR so that the banks can be better placed to play their primary role of financial intermediation in the economy,” the statement reads.

It advised the federal government to seek creative ways of addressing insecurity for farmers to return to their farmlands and address the ease of clearing cargo at the port.

Also Read:  Benefits of Floating The Naira, Here Is My Simple Analysis

Author

  • Opeyemi Quadri

    Ope is a finance writer and researcher with 10+ years of experience in content creation. His interests cut across decentralized finance, investment, foreign exchange, government policies and politics.

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