*CNBC Africa: What would it take for Nigeria to successfully unify exchange rates. This is one of the priorities for Nigeria’s President, Bola Tinubu.*
Seye Olusoga: Unifying exchange rates is a difficult task that must be done and would require a lot of courage to achieve. An attempt to unify the exchange rates in Nigeria would imply some level of official devaluation, however, would also bring additional benefits. Once the rates are converged, there will be better free flow of money and reduced arbitrage concerns. However, accomplishing this task is challenging due to the rising cost of living and the need for people to adjust to the new normal. Nonetheless, I believe it is necessary for Nigeria to reach its full potential. Rather than a gradual approach, the process should be market driven.
To achieve this, Nigeria should increase its daily oil production for exports and diversify into sectors such as mining to generate foreign exchange. The central bank can act as a regular market participant, trading excess dollar supply to meet demand. The laws of supply and demand would help stabilize the market.
*CNBC Africa: How should Nigeria pace itself to achieve this sort of monetary policy?*
Seye Olusoga: As the former president of the World Bank Group once said, a slow unification process often results in no unification at all due to pushback and vested interests. Therefore, the unification process should be swift rather than gradual. Although it may be painful, the impact might not be as severe as anticipated. For example, if the country were to announce a free float exchange rate of 780 or 760 Naira per dollar, the rate would quickly drop to around 700 Naira because people would stop hoarding. The limited number of people who have access to dollars at the current rate is worth considering. Furthermore, when prices are accurately determined, the law of supply and demand can help stabilize the market. This would allow us to shift our focus towards real production and functioning markets, presenting opportunities for everyone.
*CNBC Africa: How well would you say Nigeria has been able to tackle issues of speculations in the currency market from the stop of allocation of forex to Bureau de Change operators in 2021 up till now. Your thoughts on the CBN refuting naira had been devalued to N630/$1?*
Seye Olusoga: Progress has been made since the allocation to Bureau de Change operators in July 2021. However, it is crucial to address the rumors and allow for open discussions. As people start to witness positive changes in the market, such as the appreciation of the Nigerian Naira when oil prices drop, they will gain confidence in the functioning of the market. Imposing restrictions or defending the currency through measures like tightening the number of items or maintaining subsidies hampers market efficiency and fair distribution of resources. Subsidies primarily benefit the wealthy rather than the average person. By eliminating subsidies, individuals can make wiser decisions and optimize their resources, leading to better outcomes. For instance, families with multiple cars for routine tasks within a small radius could consolidate their transportation to reduce traffic and expenses.
*CNBC Africa: Lastly, if we don’t pursue exchange rate unification, what cost implications do you anticipate Nigeria will have to face? Take for example, dollar denominated world bank loans.*
If you look at our budget deficits, we cannot afford such.
*CNBC Africa: There’s an $800 million dollar world bank loan Nigeria has secured to ease fuel subsidy removal transition. What sort of impact do you see Nigeria facing from such a scenario?*
It all depends on what we do with the dollar loans. If we have such funds put into the economy at N465 for example, we have less naira compared to a rate of about N630, there’s a lot more naira however that feeds into driving inflation. It is more of a question of what Nigeria is using foreign sourced loans to do. If the money is invested in job creation, healthcare improvements, and infrastructure development, it will have long-term positive effects on the Nigerian economy. The focus should be on sustainable growth, rather than merely using the funds for salaries and debt servicing.
The president has already made it clear that we should expect policies and reforms that would stimulate the economy and try to reduce triggering inflationary pressures.
Credit: CNBC AFRICA
