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Exchange rate: ‘Unification insufficient to attract inflows’

Exchange rate unification may have several benefits for Nigeria’s economy, but it is not enough to attract “significant capital” into the country, analysts at FSDH Research have said. The analysts, who stated this in their Q2’21 Economic Review obtained by New Telegraph, yesterday, suggested that in addition to recent measures introduced by CBN to achieve exchange rate unification, the apex bank should roll out “consistent forex policies that seek to improve market liquidity and prevent every form of forex arbitrage and unnecessary forex subsidies.” According to the analysts, in order to further instill confidence in the market, CBN also has to clear forex backlogs.

As the analysts put it, “the action by the central bank to unify the exchange rate is a positive move for the economy. This was a recommendation in our Macroeconomic Review for 2021Q1. “With this move, the CBN has taken a step towards ensuring clarity and improving market confidence. Nigeria can also unlock funding from several multilateral organisations such as the IMF and World Bank and ease the pressure on the exchange rate in the medium term. “However, exchange rate unification is not a sufficient factor in attracting significant capital into the country.

What should follow the CBN’s recent actions, in our view, are a set of consistent forex policies that seek to improve market liquidity and prevent every form of forex arbitrage and unnecessary forex subsidies. The CBN will also need to clear forex backlogs to further instil confidence in the market. In February 2021, the IMF estimated backlogs at $2 billion. We believe this will be done gradually.” They emphasised that “as much as Nigeria needs effective management of forex and unification of exchange rate to breed confidence, the supply shortage of forex is still a major problem. Increasing forex supply from non-CBN sources is vital in maintaining exchange rate stability in the Investors and Exporters’ ( I&E) window and reducing speculative activities.

 

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