Soludo: CBN’s FX Policy Requires More Work

•  Says multiple exchange rate regime must be eliminated

Obinna Chima and Nosa Alekhuogie

A former Central Bank of Nigeria (CBN) Governor, Prof. Chukwuma Soludo, has said that despite the stability achieved in the foreign exchange (FX) market, the CBN still has a lot of work to do in order to restore confidence in the system, including eliminating the multiple exchange rate regime.

Soludo, who is the founder of the African Heritage Institution, said this on Wednesday while delivering a keynote address at the 8th annual pan-Africa investor conference organised by Renaissance Capital in Lagos. His address focused on Nigeria’s FX policy.

The central bank increased dollar sales to banks since February, effectively curbing FX shortages, which contributed to the first annual contraction in the country’s economy in more than two decades and limited trading by the country’s lenders.

Owing to the interventions, the naira has appreciated to around N385-N390 to the dollar at the moment, compared with the N525 to the dollar, prior to the CBN’s aggressive forays in the market.
But Soludo stressed the need for the central bank to eliminate the multiple exchange rate regime, saying it was causing distortions in the economy.

Elaborating on recent efforts by the CBN to improve liquidity in the FX market, Soludo said: “That is one step forward. But what is one step in getting to a long destination? Why do you have these multiple FX windows and creating all the distortions all over the place?

“Stop the multiple currency practice today. It doesn’t take much to get it done and that is where we need to be.
“Of course, they’ve taken some steps forward relative to where they were yesterday. But relative to where you ought to be, you are still a far long way off to get there and the system will continue to haemorrhage until we get it right.
“We need to eliminate the multiple exchange rate practice. While I applaud them by saying it is one step forward, but you’ve still got some other 99 steps more to go.”
The former CBN governor however acknowledged that there have been some “bright spots” in the quest to lift the economy out of recession, especially with the launch of the Economic Recovery and Growth Plan (ERGP).
But he pointed out that the ERGP still has the challenge of coherence, robustness and implementation.
“I hope that a big lesson has been learnt, and my point here is that with all its defects, there is no credible substitute to a sound macroeconomic framework for an economy such as Nigeria.

“In a foreign exchange management system where you have a dominant supplier such as the central bank, it requires more than a casual knowledge of the macro-economy,” he added.

According to Soludo, the CBN must always be seen to maintain its instrument of autonomy while being accountable.
He also argued that there seems to be some form of disarray in terms of the management of the economy.
The economist stressed the need for an “urgent framework for macro-coordination, especially between the fiscal, monetary, FX and commercial policies”.

He said: “The CBN cannot over-extend itself into commercial policies and quasi-fiscal operations, nor can we expect the central bank to credibly operate in a normal way when you have fiscal dominance.

“It requires all of them to come together, especially at this point in time. If the fiscal angle is broke and the monetary side has its challenges, you must have all these people sit down so that we can begin to restore confidence. You can’t fool the market for too long.”

While speaking on the battle against FX speculators, Soludo said speculators are much wiser, adding that they (speculators) “know the size of your reserves, they know the size of your short-term liabilities and they know how many bullets you have to fight. So, they will wait for you”.

Nevertheless, he held the view that the medium-term outlook for the Nigerian economy could still be relatively buoyant, adding that the long-term prospect for the country remains very strong provided the fiscal and monetary authorities can get certain fundamentals right.

He reiterated that while the drop in oil prices and decline in output led to shocks in the economy, the policy response in the past two years aggravated the slide, thus precipitating the recession.

“The collateral damage of the past errors would still linger for a while. So when you take 100 steps backwards and you only take 15 forward, everybody applauds, which is progress, even though you are short of where you started.
“But the confidence and credibility will take time to build. So, the effects of the damaged confidence would take quite a while to rebuild.

“Let me say that on the current regime on FX and monetary policies, my view is that if it continues, the so called recovery would remain tepid and sluggish because of the fiscal dominance, escalating debts and partly because of the exchange rate conundrum.

“The fiscal resources that are earned in dollars are often converted into the local currency at N305 to a dollar, whereas the domestic price level has adjusted closer to the parallel market rate.
“So this fiscal gap would continue. Of course, the government wants to borrow to fill the gap; then it becomes a vicious cycle of escalating debt overhang.

“There is a high probability that the future servicing of that debt would be at a higher FX rate and with some price to be paid. Multiple FX practices would remain if we continue with this regime, domestic prices would continue to overshoot and the real effective exchange rate would remain overvalued, which would be contrary to the advertised goal of diversifying the economy and attaining competitiveness,” he added.

He also urged the CBN to remove the ban on 41 items from accessing FX from the interbank market, saying higher tariffs and trade policies should be used to discourage the importation and consumption of such goods.
In his presentation, the Global Chief Economist at Renaissance Capital, Charles Robertson, expressed optimism that Nigeria’s Ease of Doing Business policy would lead to improvements in the next 12 months.

He advised the government to push for policies that would lead to the industrialisation of the economy, just as he bemoaned the slow efforts at resolving the challenges in the power sector.