Emefiele: Why we do not want to float the exchange rate

The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, has explained why the apex bank cannot freely float the exchange rate despite pressure from the World Bank and International Monetary Fund (IMF) to do so.

Emefiele said that freely floating the exchange rate will lead to some uncontrollable spiral effect on Nigeria’s exchange rate.

This was made known by Emefiele during a chat with journalists on the sidelines of the IMF/World Bank Spring Meetings in Washington DC, United States of America (USA) while responding to a call by the President of the World Bank Group, David Malpass, for Nigeria to do away with its multiple exchange rate systems and rather maintain a single exchange rate system.

Emefiele who stressed that different countries have different challenges and must develop solutions that will help address those challenges said that the CBN will continue to make IMF and World Bank understand the peculiar situations that Nigeria faces and how to tackle them for the progress of the economy.

What the CBN Governor is saying

Emefiele defended the apex bank’s managed-float exchange rate system, stressing that it was adopted to address the peculiar challenges the country faces.

• The CBN Governor said, “Both the IMF and World Bank are our prime development banks, and we have received support from them at different times in resolving some of our economic challenges, particularly bothering on finance.
• “Nigeria’s situation is very peculiar and that is why we have continued to engage the IMF and World Bank to show understanding of our local problems. And they are indeed showing understanding.
• “Yes they want us to freely float the exchange rate and you do know that this will have some impact on the exchange rate itself in the sense that when you allow that to happen, you will have some uncontrollable spiral in the country’s exchange rate.”
• He also maintained that what the CBN was doing was managing demand by curbing excessive imports such as petroleum products and commodities.

Emefiel’s CBN Forex Strategy in a nutshell

• “Between the importation of refined products alone, into the importation of whether it is rice or sugar or wheat this consumes close to about 40% of foreign exchange that is needed to fund imports in Nigeria. And if we find for instance by the end of this year we are able to say we are no longer going to be needing foreign exchange to import petroleum products, right now no foreign exchange for the importation of rice, maize, and some amount for wheat (sic), I believe some demand will drop and when demand drops what you will find is that whatever supply we have is able to match the demand and then we can see a stable exchange rate. That is what we are trying to see to” Emefiele

He pointed out that what the CBN had been doing was to ensure that even as they run the managed float, there should be some interventions put in place to really control the exchange rate.

• He, noted that as long as the demand for forex exceeds the supply, the challenge would persist, saying, “We are doing everything possible to restructure the base of the economy through some of the policies that we have put in place to deepen the production of goods in Nigeria.”
• He also maintained that despite the criticisms of their policy the exchange rate has devalued from about N165/$1 to N420/$1 on the official market between 2014 and 2021.

Emefiele on IMF Commendation

On the commendation received from IMF over the positive momentum in Nigeria’s non-oil sector, Emefiele said,

• “I am happy that the IMF and World Bank are seeing efforts to drive non-oil exports. Before now, we have always relied on earnings from crude oil as well as foreign portfolio investments and foreign direct investments.
• “We will continue to look at how to improve non-oil exports, particularly through export proceeds and so on. I am happy that other people outside Nigeria are seeing these efforts and this means we will continue to do more to ensure that we really deepen this and fund imports with proceeds from exports and with less reliance on the central bank.”

What you should know

• Nigeria has been faced with serious foreign exchange crisis since the global economic crisis in 2015 and the Covid-19 pandemic which has led to led to the devaluation of the naira amongst other restrictive policies by the CBN.
• This has been exacerbated by the country’s dependence on mono foreign earnings, continuous borrowings, declining foreign investment inflows, rising capital flight, overreliance on ways and means advances, expanded money supply, to general uncertainty, which all intensifies the pressure on the naira.
• The local currency has faced intense pressure since the Central Bank of Nigeria (CBN) adopted the investors’ and exporters’ (I&E) Window as the default official exchange rate.
• The World Bank and the IMF as well as various experts have been critical of the maintenance of multiple exchange rates which they say promotes corruption and distorts the economy.
• However, the CBN has held on to a controlled forex policy curbing demand for forex and managing supply. The demand side exchange rate policy has created multiple exchange rate regimes and widened the disparity between the black market and official rates of exchange.
• The President of the World Bank Group, Mr. David Malpass, had on Wednesday, said there was need for Nigeria to do away with its multiple exchange rate system, which according to him was often, “complicated and is not as effective as it would be if there were a single exchange rate.”