Emefiele: Why we don’t want to float the exchange rate
Central Bank of Nigeria (CBN) Governor Godwin Emefiele has explained why the apex bank cannot float the exchange rate freely despite pressure from the World Bank and the International Monetary Fund (IMF).
Emefiele said the free floating exchange rate would lead to an uncontrollable spiraling effect on Nigeria’s exchange rate.
Emefiele said this during a conversation with journalists on the sidelines of the IMF and World Bank Spring Meetings in Washington DC, United States of America (USA) while answering a call World Bank Group President David Malpass for Nigeria to get rid of its multiple exchange rate systems and instead maintain a single exchange rate system.
Emefiele, who pointed out that different countries have different challenges and need to develop solutions that will help address these challenges, said the CBN will continue to impress upon the IMF and the World Bank the particular situations facing Nigeria and how solve them for the progress of the economy.
What the CBN Governor Says
Emefiele defended the apex bank’s managed float exchange rate system, pointing out that it was adopted to address the particular challenges facing the country.
- The CBN Governor said:The IMF and the World Bank are our main development banks, and we have received their support at different times to solve some of our economic problems, particularly in terms of financing.
- “Nigeria’s situation is very unique and that is why we have continued to engage the IMF and the World Bank to show our understanding of our local issues. And they do show understanding.
- “Yes they want us to let the exchange rate float freely and you know that will impact the exchange rate itself in the sense that when you allow that to happen you will have the rate spiraling out of control. change of country.”
- He also argued that what the CBN was doing was managing demand by limiting excessive imports such as petroleum products and raw materials.
Emefiel’s CBN Forex Strategy in Brief
- “Between the import of refined products and the import of rice, sugar or wheat, this consumes almost around 40% of the foreign exchange needed to finance imports into Nigeria. And if we find for example that by the end of this year we are able to say that we will no longer need foreign exchange to import petroleum products, currently no foreign exchange to import rice, corn and a certain amount for wheat (sic) I believe some of the demand will drop and when the demand drops you will find that whatever supply we have is able to meet on demand and then we can see a stable exchange rate. That’s what we try to do” Emefiele
He pointed out that what the CBN had done was to ensure that even if they were handling the managed float, certain interventions would have to be put in place to actually control the exchange rate.
- He noted that as long as forex demand exceeds supply, the challenge will persist, saying, “We are doing all we can to restructure the base of the economy through some of the policies we have put in place to deepen the production of goods in Nigeria.
- He also maintained that despite criticism of their policy, the exchange rate devalued from around N165/$1 to N420/$1 in the official market between 2014 and 2021.
Emefiele on IMF Commendation
On the praise received from the IMF for the positive momentum in Nigeria’s non-oil sector, Emefiele said:
- “I am pleased that the IMF and World Bank are seeing efforts to boost non-oil exports. Until now, we have always relied on crude oil revenues as well as foreign portfolio investment and foreign direct investment.
- “We will continue to look at how to improve non-oil exports especially through export earnings etc. I am glad that others outside Nigeria are seeing these efforts and that means we will continue to do more to ensure that we are really deepening this and financing imports with the proceeds of exports and less dependence on the central bank.
What you should know
- Nigeria has been facing a severe currency crisis since the 2015 global economic crisis and the Covid-19 pandemic which led to the devaluation of the naira among other restrictive CBN policies.
- This situation has been exacerbated by the country’s reliance on foreign mono income, continued borrowing, declining foreign investment flows, increasing capital flight, overreliance on and means, the increase in the money supply, the general uncertainty, which intensifies the pressure on the naira.
- The local currency has come under intense pressure since the Central Bank of Nigeria (CBN) adopted the Investors and Exporters (I&E) window as the official default exchange rate.
- The World Bank and IMF as well as various experts have criticized the maintenance of multiple exchange rates which they say promote corruption and distort the economy.
- However, the CBN maintained a controlled foreign exchange policy, limiting the demand for currency and managing the supply. Demand-side exchange rate policy has created multiple exchange rate regimes and widened the gap between the black market and official exchange rates.
- World Bank Group President David Malpass said on Wednesday that there was a need for Nigeria to get rid of its multiple exchange rate system, which he said was often, “complicated and not as efficient as it would be if there were a single exchange rate.