Agora Policy, an Abuja-based policy think tank, has suggested some strategic ways in which the Central Bank of Nigeria (CBN) may tame the Nigerian forex market amid the continued depreciation of the naira against the dollar in the country’s forex markets.
In a new report titled “Nigeria’s Nascent Currency Reform Stabilization” released on Monday, the policy think tank said Nigeria needs a lot of dollars and fast to provide liquidity in the economy.
In the past three months since the move to unify currency rates came into effect, the naira has continued to fall on the official market to trade at N780.00 and above the N465.13 per dollar mark that was trading in the mid- of May.
Similarly, in the parallel market, the local currency hit an all-time low to trade at N930.00 and up for $1.
In their report, the think tank said that without direct attempts to stem the tide, the temptation to go back to the old (multiple exchange rates) ways of running things might seem appealing, potentially ruining the current opportunity.
CBN headquarters in Abuja
“A look at the fundamentals reveals the existence of large imbalances in Nigeria’s external accounts caused by a combination of structural changes and CBN policy mistakes as the bane of current FX woes,” Agora’s policy report said. .
He said simple currency adjustments to match reality can lead to short-lived gains, followed by a return to past practices.
To avoid this cycle, the group of experts pointed out that exchange and monetary policies must be part of a comprehensive economic plan in which the exchange rate serves as a tool for the diversification of exports and the attraction of capital flows to promote growth. overall development.
Background
Agora Policy’s intervention comes against the backdrop of new revelations that Central Bank of Nigeria (CBN) securities lending by JP Morgan and Goldman Sachs could send Nigeria’s credit rating plummeting.
The main bank, in its recently released 2022 financial statements, reported borrowing $7.5 billion from US banks JP Morgan and Goldman Sachs by pledging securities.
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Analysts say the loan deal, which the central bank says was arranged “in exchange for its securities being held as collateral,” may hurt the nation’s fragile fiscal position and credit rating.
Nigeria’s dollar bond due 2030 already sank 2.295 cents to its lowest in a month on Friday at 83.221 cents as a crisis of confidence in the economy among investors deepened.
way to go
To address the current challenge, the think tank said policymakers should try to hit the nail on the head while it’s hot to avoid reform fatigue by seeking sources of large dollar liquidity on concessional terms.
This, he said, can be achieved by exploring the option of a multilateral agency standby agreement of significant scale ($5-10 billion) with the aim of acquiring credibility.
“Having advanced fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyze further capital flows,” the report said.
While this is politically complicated, the think tank explained that desperate times call for bold and desperate measures.
He said the global geopolitical environment means Nigeria has a window to get this funding if it is ready to push the envelope.
“These dollar flows are needed to give the market ‘breathing time’, as if they are not resolved, the Naira could come under further speculative pressure which could prompt lawmakers to return to the very fixed deal they recently scrapped,” noted the report.
He said that the CBN should seek to be flexible in thinking, as there are various variants of flexible currency regimes, which should be pragmatic not to rule out any option.
“The goal is to ensure that exchange rate adjustments credibly reflect trends in the balance of payments in the short and medium term,” the think tank said.
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Let hear it in the comment below if you do have an opinion on this; How to address Nigeria’s currency crisis – Agora Policy