The Chief Executive Officer, Centre for the Promotion of Private Enterprise, CPPE, and immediate past Director-General, Lagos Chamber of Commerce and Industry, LCCI, Dr Muda Yusuf, has proposed the adoption of a flexible exchange rate policy regime.
Speaking at a workshop organized by the Commerce and Industry Correspondent Association of Nigeria, CICAN, with the theme: “Impact of Forex Crisis on the Real and SME Sectors”, Yusuf clarified that the proposition is not a devaluation but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.
He said it is “a model that is sustainable, predictable and transparent; a policy regime that would reduce uncertainty and inspire the confidence of investors and a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism.
Explaining the rationale behind his recommendations, Yusuf stated, “The sharp depreciation of the naira exchange rate in the parallel market remains a cause for concern. It is a trend that should not be allowed to continue and all necessary steps need to be taken (and urgently too) to stem the slide and volatility.
“These developments should not be ignored. It is as much of an issue to consumers as it is to producers and other stakeholders that create value in the economy. It calls for an urgent review of the current foreign exchange policy.
“My proposition is that we should adopt a flexible exchange rate policy regime. Let me clarify that this is not a devaluation proposition. Rather is it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market. It is a model that is sustainable, predictable, and transparent. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism,” he said.
Describing devaluation as a policy choice often adopted to boost export and discourage imports, he said countries adopt this measure, not necessarily because they have a foreign exchange or balance of payment crisis; but as a deliberate trade policy strategy to make their exports cheaper.
A flexible exchange rate regime on the other hand is adopted to cope with changing demand and supply conditions in the forex market.
He said that the flexible exchange rate model enhances liquidity in the foreign exchange market; it reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors; it is more transparent as a mechanism for forex allocation; minimizes discretion in the allocation of forex, among others.
He added that a fixed exchange rate regime creates a widening gap between the official and parallel market exchange rates; the collapse of liquidity in the foreign exchange market resulting in acute scarcity; mounting trade debts; increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs, among others.