CBN targets market-determined exchange rates

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’Femi Asu

The Central Bank of Nigeria is in the process of improving the implementation of its current policies, aimed at achieving a market-determined exchange rate regime to build confidence and encourage foreign exchange inflows.

An Economic Recovery and Growth Plan released on Tuesday by the Ministry of Budget and National Planning said the CBN’s monetary policy decisions and actions had prioritised price stability.

It noted that in 2015, the central bank introduced a ban on 41 goods and services from accessing foreign exchange in the inter-bank foreign exchange rate market.

“It is instructive to point out that this is a temporary policy measure that would be reviewed with a view to removing the market restrictions over time,” the ERGP said.

The economic plan also noted that in 2016, the CBN moved to curb inflation by raising the monetary policy rate (benchmark interest rate) by two percentage points to 14 per cent in the middle of the year.

“The CBN is currently supporting growth in the rest of the economy through its dedicated support to micro, small and medium enterprises and the agricultural sector, through initiatives such as the Anchor Borrowers Programme, which allowed participants in the agricultural value chain to access credit at single digit rates of interest,” it said.

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The PUNCH had on Monday reported that foreign investors were still staying on the sidelines, waiting for the naira to float freely, as the latest foreign exchange policy of the CBN had failed to restore confidence.

The CBN had on February 20 said it would provide direct funding to banks to meet the needs of Nigerians for personal and business travels, medical needs and school fees, effective immediately.

Reuters reported on Tuesday that a currency devaluation may do little to fix Nigeria’s problems unless it followed the examples of emerging market peers, Egypt, Argentina and Russia, and embraces floating exchange rates.

It said grappling with recession, widespread dollar shortages, a budget funding gap and international lenders’ reluctance to provide loans, the country has moved tentatively to devalue its currency.

The naira traded as low as 375 per dollar on Monday versus the official rate of 305, although that was still far stronger than black-market levels, which was around 450 to a dollar.

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Such crises have occurred time and again in emerging markets, as countries are forced to ditch currency pegs, often after weeks or months of resistance that drain central bank coffers and send the economy into a tailspin.

But the Nigerian case had shown that currency reform cannot be half-hearted. Last June, authorities devalued the naira by 30 per cent only to then return it to its straitjacket. Within days, dollar hoarding and currency black markets re-appeared and a stock market rally quickly fizzled.

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