How to address Nigeria’s forex crisis – Agora Policy

Agora Policy, an Abuja-based policy think-tank, has suggested some strategic ways in which the Central Bank of Nigeria (CBN) can tame Nigeria’s tenderfoot foreign exchange market amidst the continuous depreciation of the naira against the dollar across forex markets in the country.

In a new report titled “Steadying Nigeria’s Fledgling Foreign Exchange Reform” published on Monday, the policy think-tank said Nigeria needs a big stash of dollars and fast to provide liquidity in the economy.

In the last three months since the move to unify forex rates took effect, the naira has continued to decline at the official market to trade at N780.00 and above the mark from N465.13 per dollar it traded in mid-May.

Similarly, at the parallel market, the local currency touched an all-time low to trade at N930.00 and above per $1.

In its report, the think tank said without direct attempts to stem the tide, the temptation to return to the old ways (multiple exchange rates) of managing things might look attractive, which might blow away the current opportunity.

“A look at the fundamental data reveals the existence of large imbalances in Nigeria’s external accounts occasioned by a mix of structural shifts and policy missteps by the CBN as the bane of the present FX woes,” the Agora policy report said.

It said mere forex adjustments to adapt to reality may lead to short-lived gains, followed by a return to previous practices.

To avoid this cycle, the think-tank noted that forex and monetary policies should be part of a comprehensive economic plan where the exchange rate serves as a tool for export diversification and attracting capital flows to foster overall development.

Background

Agora Policy’s intervention comes against the background of fresh revelations that the Central Bank of Nigeria’s (CBN)’s security borrowing from JP Morgan and Goldman Sachs could set Nigeria’s credit rating on a free fall to junk.

The apex bank, in its newly released 2022 financials, reported borrowing $7.5 billion from U.S banks JP Morgan and Goldman Sachs by pledging securities.

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Analysts say the loan deal, which the central bank said was contracted “in exchange for its securities to be held for collateral”, may impair the nation’s fragile fiscal position and credit rating.

Already, Nigeria’s dollar bond due in 2030 sank 2.295 cents to its lowest level in the past one month on Friday at 83.221 cents as a crisis of confidence in the economy heightened among investors.

Way forward

To address the present challenge, the think tank said policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large dollar liquidity on concessional terms.

This, it said, can be achieved by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10billion) with the objective of acquiring credibility.

“Having front-loaded fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyse increased capital flows,” the report said.

While this is politically tricky, the think-tank explained that desperate times call for bold and desperate measures.

It said the global geopolitical environment means Nigeria has a window to obtain this funding if it is ready to push the envelope.

“These dollar flows are necessary to give the market ‘time to breathe’ as left unsolved, the Naira could come under fresh speculative pressures which might drive a return in policymakers towards the very pegged arrangement they recently jettisoned,” the report noted.

It said the CBN must look to be flexible in thinking as there are several variants of flexible forex regimes, which it should be pragmatic not to rule out any options.

“The goal is to ensure that FX adjustments reflect the trends in balance of payments in a credible manner over the near and medium term,” the think-tank said.