Agora Policy: Why Nigeria Must Deploy Holistic Approach to FX Operations

*Seeks standby arrangement for $10bn to aid liquidityEmmanuel Addeh in Abuja

Following the naira’s loss of over 40 per cent value since it was  floated, Agora Policy, an Abuja-based think-tank, has recommended a holistic, economy-wide management approach to ensure the stability of the weakening currency.

In its latest policy brief themed: “Steadying Nigeria’s Fledgling Foreign Exchange Reform”, the Waziri Adio-led organisation, queried the speed with which the Bola Tinubu-led administration floated the naira, without any plan to boost dollar inflow.

Given the prevailing situation, Agora, in the brief, argued that without direct attempts to stem the tide, the temptation to return to the old ways of managing things might look attractive, which might in turn, blow away the current opportunity.

Agora explained that the extant attempt must be situated within the context of wider discussions about macroeconomic strategy, insisting 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 for attracting capital flows to foster overall development.

“The long-stated objective of Nigeria’s policymakers is to diversify its export base…to ensure export competitiveness of these non-oil exports, exchange rates policies must look to deliver an extra layer of competitiveness to export prices in a form that favours domestic industries.

“To this end, the goal of policymakers on FX is not nominal exchange rate stability but real exchange rate stability with an undervaluation bias. To this end, Nigeria’s FX policy must look to ensure a balance between real exchange rate stability that ensures non-oil export competitiveness and keeps inflation at a level supportive of domestic welfare.

“Nigeria’s economic managers must explicitly seek to achieve this balance and must demonstrate annually how their policy measures or adjustments deliver on these goals,” it added.

In creating a workable FX market architecture, Agora advised that Nigerian policymakers must envision a distinct set of supply forces, namely multiple FX sources which can be attained by removing all forced sale rights on oil exports presently held by the Central Bank of Nigeria (CBN).

Rather, it advocated a situation where the CBN should be allowed to purchase its dollars like every market participant to manage naira liquidity at a level consistent with its own money supply objectives.

According to the think-tank, a credible FX reform will end the forced petro-dollar to naira conversions financed via the printing of new money. The goal, it said,  is to create an FX market with diverse players especially on the supply side, including the CBN, oil exporters, non-oil exporters, remittances, foreign portfolio investors, among others.

“In lieu of nominal exchange rate targeting, Nigeria’s central bank must have an explicit inflation targeting framework with clear annual and intermediate inflation target that are publicly known and must annually demonstrate how its policies achieve this objective.

“The CBN can have several inflation measures (consumer price index, producer price index, wage inflation etc) to prevent undue reliance on one metric and importantly it should demonstrate how its adjustment of policy instruments (interest rates and money supply) are enabling it move inflation within targets.
“Nigeria’s fiscal and legislative arms should be on hand to deploy censure to CBN governors unable to deliver within target inflation. To avoid the egregious abuses over the last five years, Nigeria should look to divorce CBN control over development finance banks and capitalise these entities to fund underserved sectors of the credit market,” it added.

To help proper FX pricing, it pointed out that Nigeria’s central bank must work to deliver increased information about demand and supply trends and end the dark ages on critical data on trends across FX markets.

As in some markets like Singapore, the proposed CBN legislation, it said, must include requirements for publication of period data and analysis of trends in FX markets to the public.

“This requirement must impose penalties for non-compliance. Under the suspended CBN governor, the CBN commenced data censorship with the withdrawal of more in-depth data which created no transparency on FX markets,” it said in the brief.

Beyond developing deep and liquid spot markets, Agora Policy maintained that concerted efforts must be on including avenues for hedging without any arcane restrictions that look to curb speculation.

“The CBN should work with exporters and financial institutions to develop the means for importers to hedge against FX volatility risk to prevent demand front-loading. Nigeria should work actively to ensure that the large USD flows (including remittance flows) equilibrate within the official segments,” it added.
While stressing that Nigerian policymakers must be clear-eyed to have a system for dealing with periods when markets become volatile, the think-tank noted that there must be a clear operational framework for dealing with periods of external shocks which should include providing temporary liquidity, interest rate adjustments, communication and FX adjustments.

“Beyond these broad medium to long term objectives, policymakers must not ignore the near term. To stabilise the present spiral, Nigeria needs a big stash of dollars and fast!

“Policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large USD liquidity on concessional terms by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10billion) with the objective of acquiring credibility,” it advocated.

Having front-loaded fiscal consolidation and external sector adjustments, the organisation argued that Nigeria has the credibility to embark on key partnerships to catalyse increased capital flows.

While it admitted that this is politically tricky, it averred that desperate times call for bold and desperate measures. The global geopolitical environment, it said, 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 CBN must look to be flexible in thinking. There are several variants of flexible FX regimes and we should be pragmatic to not 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,” it stated.