In set above: Nigeria’s President, Senator Bola Ahmed Tinubu, (left) and the Central Bank of Nigeria, CBN Governor, Mr. Yemi Cardoso.
By Wahab Shittu, SAN, Ph.D.
Exchange rate instability in Nigeria significantly affects the economy, leading to various challenges. Here are some key impacts it has on the economy.
. Inflation: A weaker naira increases the cost of imports, contributing to higher inflation rates. This reduces the purchasing power of Nigerians and affects their standard of living.
. Economic Growth: Despite reported GDP growth, the naira’s devaluation can render this growth meaningless in terms of foreign exchange value. Nigeria’s GDP might grow in local currency terms, but its value in dollars could shrink.
. Investor Confidence: Exchange rate volatility can deter foreign investment, as investors seek stable environments to park their wealth. A stable and competitive exchange rate is crucial for attracting foreign direct investment.
. Business Planning: Uncertainty around exchange rates makes it challenging for businesses to plan and budget effectively. This can lead to reduced investment and slower economic growth.
. Poverty and Inequality: The rising cost of living, fueled by exchange rate instability and inflation, disproportionately affects the poor and vulnerable populations, exacerbating poverty and inequality.
The Nigerian government has implemented measures to stabilize the exchange rate, including:
. Floating Exchange Rate Regime: Allowing market forces to determine the naira’s value.
. Clearing FX Backlogs: The Central Bank of Nigeria (CBN) has cleared over $7 billion in FX backlogs, improving market confidence.
. Electronic Foreign Exchange Matching System: Introduced to enhance transparency and efficiency in the FX market.
. Regulatory Guidelines: The CBN has issued guidelines to prevent FX manipulation and ensure stability.
How then can the government maintain a competitive naira in the market to cure inflation and stabilize the exchange rate.
To maintain a competitive Naira and stabilize the exchange rate, the Government of Nigeria can consider the following strategies:
Monetary Policy Measures
. Interest Rate Adjustments: The Central Bank of Nigeria (CBN) can adjust interest rates to control inflation and attract foreign investment. For instance, the CBN has hiked the Monetary Policy Rate to 27.5% to curb inflation.
. Cash Reserve Ratio (CRR) Management: The CBN can manage liquidity levels in the banking system by adjusting the CRR, ensuring that banks have sufficient funds to support economic growth.
. Open Market Operations (OMO): The CBN can use OMO to regulate liquidity and stabilize the exchange rate.
Fiscal Policy Measures
. Reducing Budget Deficits: The government can reduce budget deficits to minimize the strain on the exchange rate and attract foreign investment.
. Increasing Revenue: Implementing policies to increase revenue can help reduce the country’s reliance on imports and support the Naira.
Structural Reforms
. Improving Agricultural Productivity: Enhancing agricultural productivity can reduce food imports and alleviate pressure on the exchange rate. Nigeria’s food inflation rate stands at 40.53%, partly due to insecurity in agricultural heartlands.
. Infrastructure Development: Investing in infrastructure can improve the business environment, attract foreign investment, and support economic growth.
. Promoting Financial Inclusion: Expanding financial inclusion can increase access to financial services, support small businesses, and promote economic growth. The CBN aims to achieve 80% adult financial inclusion by 2026.
Exchange Rate Management
. Electronic Foreign Exchange Matching System: The CBN’s electronic FX matching system can enhance transparency and restore confidence in the market.
. Diaspora Remittances: The CBN can target diaspora remittances to attract foreign exchange inflows, with a goal of $1 billion monthly inflows.
How the Ministry of Finance can assist in this regard is here explained. The Ministry of Finance in Nigeria plays a crucial role in curtailing inflation, stabilizing the exchange rate, and maintaining the Naira’s competitiveness in the market.
Here are some key ways the ministry contributes:
. Fiscal Policy Formulation: The Ministry of Finance formulates and implements fiscal policies that complement the Central Bank of Nigeria’s (CBN) monetary policies, aiming to control inflation and stabilize the exchange rate.
. Revenue Generation: The ministry works to increase revenue generation through tax reforms and other initiatives, reducing the country’s reliance on oil revenue and supporting the Naira’s stability.
. Expenditure Management: Effective management of government expenditure helps maintain fiscal discipline, reduce budget deficits, and mitigate pressure on the exchange rate.
. Investment Promotion: The ministry promotes investments in key sectors, such as agriculture and infrastructure, to boost economic growth, increase foreign exchange earnings, and support the Naira’s competitiveness.
. Collaboration with CBN: The Ministry of Finance works closely with the CBN to ensure synchronized fiscal and monetary policies, supporting macroeconomic stability and the Naira’s stability.
. Policy Reforms: The ministry implements policy reforms aimed at improving the business environment, enhancing transparency, and reducing corruption, all of which contribute to maintaining the Naira’s competitiveness.
Some specific initiatives include:
. Removal of Fuel Subsidies: The government’s removal of fuel subsidies aims to reduce fiscal burdens and allocate resources to more critical areas, supporting macroeconomic stability.
. Digital Innovation: The introduction of the eNaira, a central bank digital currency, enhances payment systems, increases financial access, and allows real-time data tracking of consumer behaviour, supporting monetary policy execution.
. Foreign Exchange Management: The CBN’s unification of multiple exchange rate windows aims to eliminate arbitrage and enhance transparency in the foreign exchange market, supporting the Naira’s stability.
By implementing these measures, the Ministry of Finance plays a vital role in supporting Nigeria’s economic stability and maintaining the Naira’s competitiveness in the market.
The Nigerian government’s political decisions significantly impact on the exchange rate and the economy. Some key factors include:
. Fuel Subsidy Removal: The removal of fuel subsidies has led to a significant increase in petrol prices, contributing to higher inflation rates and economic hardship for Nigerians. This policy change has also affected the naira’s value and the overall economy.
. Exchange Rate Liberalization: The liberalization of the foreign exchange market has resulted in a substantial depreciation of the naira, making imports more expensive and contributing to inflation. This policy aims to attract foreign investment and promote economic growth but has had short-term negative consequences.
. Monetary Policy: The Central Bank of Nigeria’s (CBN) monetary policies, such as interest rate adjustments, influence the economy and exchange rate. Recent rate hikes aim to control inflation but have increased borrowing costs and affected economic activity.
. Fiscal Policy and Tax Reforms: The government’s fiscal policies, including tax reforms, impact revenue generation and government expenditure. These policies can influence investor confidence, economic growth, and the naira’s stability.
. Election-Related Spending: As Nigeria approaches its 2027 general elections, politicians’ spending on campaigns could increase demand for foreign currencies, potentially destabilizing the exchange rate.
. Oil Price Fluctuations: As an oil-dependent economy, Nigeria is vulnerable to fluctuations in global oil prices. A decline in oil prices can reduce foreign exchange inflows, affecting the naira’s value and the economy.
To mitigate these impacts, the government can consider:
- Sustained Economic Reforms: Implementing consistent economic reforms can promote stability and attract investment.
- Improved Agricultural Productivity: Enhancing agricultural productivity can reduce food imports and alleviate pressure on the exchange rate.
- Infrastructure Development: Investing in infrastructure can improve the business environment and support economic growth.
- Fiscal Discipline: Maintaining fiscal discipline can reduce budget deficits and promote macroeconomic stability.
A well-designed regulatory framework can positively impact the stability of the exchange rate and promote a robust economy in several ways:
. Clear Guidelines: Establishing clear guidelines for foreign exchange transactions can reduce uncertainty and promote stability in the exchange rate.
. Transparency and Accountability: Ensuring transparency and accountability in foreign exchange transactions can help prevent manipulation and promote fair market practices.
. Effective Oversight: Effective oversight by regulatory bodies can help detect and prevent illicit activities, such as money laundering and terrorist financing, which can destabilize the exchange rate.
. Investor Confidence: A robust regulatory framework can promote investor confidence, attracting foreign investment and supporting economic growth.
. Risk Management: Regulatory frameworks can help manage risks associated with foreign exchange transactions, such as exchange rate volatility and credit risk.
. Financial Inclusion: Promoting financial inclusion through regulatory frameworks can increase access to financial services, support small businesses, and promote economic growth.
Some key regulatory measures that can support exchange rate stability and a robust economy include:
. Foreign Exchange Regulations: Clear regulations governing foreign exchange transactions can promote stability and transparency.
. Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) Regulations: Effective AML/CFT regulations can help prevent illicit activities and promote financial stability.
. Capital Controls: Carefully designed capital controls can help manage risks associated with foreign exchange transactions and promote economic stability.
. Prudential Regulations: Prudential regulations can help ensure the stability of financial institutions and promote a robust financial system.
By implementing a well-designed regulatory framework, governments can promote exchange rate stability, attract investment, and support economic growth.
Exchange Rate Stability and Economic Growth in Africa
African countries such as South Africa, Egypt, and Ethiopia have implemented various strategies to address exchange rate instability and built robust economies.
South Africa
. Exchange Rate Management: South Africa’s central bank, the South African Reserve Bank (SARB), has implemented policies to manage exchange rate volatility, which has positively impacted economic growth.
. Fiscal Discipline: The government has maintained fiscal discipline, reducing budget deficits and promoting macroeconomic stability.
. Investment Promotion: South Africa has promoted investments in key sectors, such as infrastructure and energy, to boost economic growth and attract foreign investment.
. Challenges: Despite these efforts, South Africa still faces structural challenges, including power shortages, high unemployment, and sluggish policy reforms, which have hindered growth and investor confidence.
Egypt
. Economic Reforms: Egypt has undertaken significant economic reforms, including implementing a flexible exchange rate regime, which has helped to reduce distortions and promote economic stability.
. IMF Support: Egypt has received support from the International Monetary Fund (IMF), including a loan agreement worth $8 billion, to help stabilize its economy and implement reforms.
. Debt Restructuring: The Egyptian government has worked with creditors to restructure debts and secure new financing, which has helped to improve economic stability.
. Challenges: Despite these efforts, Egypt still faces significant economic challenges, including a large budget deficit and high inflation.
Ethiopia
. Economic Reforms: Ethiopia has implemented economic reforms aimed at promoting growth and stability, including measures to liberalize its economy and attract foreign investment.
. Infrastructure Development: The Ethiopian government has invested heavily in infrastructure development, including energy and transportation projects, which has helped to boost economic growth.
. IMF Support: Ethiopia has received support from the IMF, including financing assurances to help the government implement its macroeconomic reform programme.
. Growth Projections: Ethiopia is projected to achieve a growth rate of 8.9% in the 2025/2026 fiscal year, driven by government reforms and investment in infrastructure.
Regional Cooperation and Integration
African countries are also working towards regional cooperation and integration, including:
. African Continental Free Trade Area (AfCFTA): The AfCFTA aims to promote intra-African trade and economic integration by reducing trade barriers and improving infrastructure.
. Pan-African Payment and Settlement System (PAPSS): PAPSS is a payment system that aims to reduce transaction costs and reliance on foreign currencies, promoting economic integration and stability.
. Regional Development Finance Institutions: African development finance institutions are being strengthened through increased capitalization and more equitable global regulatory frameworks, which will help to promote economic development and stability.
In conclusion, a proper implementation of the strategies as discussed in this article can assist the authorities towards maintaining a competitive Naira, stabilizing the exchange rate, and promoting economic growth.
In the same vein, the efforts should gear towards stabilizing the exchange rate, maintaining a competitive naira value as it is crucial for Nigeria’s economic growth as well as attracting foreign investments.
Dr. Shittu is a Lagos-based Senior Advocate of Nigeria and social commentator.
