CPPE Lauds Unification of Naira Exchange Rate

• Says, liberalization  of foreign exchange market would unlock huge potentials for investment, jobs, capital flows, Investors’ confidence

The Centre for the Promotion of Private Enterprise (CPPE) has commended the bold step taken by the Tinubu administration towards the unification of the naira exchange rate.

The liberalization of the foreign exchange market, CPPE stated, would unlock the huge potentials for investment, jobs and capital flows as well as investors’ confidence being positively impacted.

In a position paper, made available to Gentechnews the Chief Executive Officer, (CEO) CPPE, Dr. Muda Yusuf, the Centre for the Promotion of Private Enterprise clarified that this is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.

Yusuf, however, explained that it is a framework which allows for flexible rate adjustments as and when necessary.

“It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It would minimize discretion and arbitrage in the foreign exchange allocation mechanism.

“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10 per cent.

“It is a normalization of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply. It would be dynamic; and the naira will appreciate or depreciate depending on the fundamentals.

“In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalizes and moves towards equilibrium, the rate would moderate. We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market,” CEO CPPE stated.

Commenting on benefits of a unified exchange rate regime, he stated that: it 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 mechanism for forex allocation; it minimizes discretion in the allocation of forex and reduces corruption vulnerabilities and reduces opportunities for round tripping and other sharp practices among others.

“The erstwhile foreign exchange policy regime on the other hand was, for all practical purposes, a fixed exchange rate regime. It created the following distortions and negative outcome:

“Widening gap between the official, other multiple windows and parallel market exchange rates which created room for forex roundtripping to flourish.

“Collapse of liquidity in the foreign exchange market resulting in acute forex scarcity. It fueled demand for forex because of the incredible rent opportunities created by the huge parallel market premium and created a major disincentive for forex inflows into the economy, thus suppressing forex supply.

“However, the CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilize the exchange rate and prevent volatility. This should happen not by fixing rate, but by boosting supply to the extent that the reserves can support,” Yusuf cautioned.