Depreciation of naira in parallel market remains a cause for concern-Dr Yusuf, CEO CPPE

 The Chief Executive Officer (CEO) of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf has expressed worries over the sharp depreciation of the naira exchange rate in the parallel market, saying that it remains a cause for concern.

He described the situation as 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,” said the former Director-General of the Lagos Chamber of Commerce and Industry (LCCI).

 Speaking  on  the Impact of Forex Crisis on the Real and SME Sectors at the CICAN Annual Workshop and Awards held at Lagos Sheraton Hotel Ikeja 16th December 2021, Yusuf said  the challenges of forex on the real sector, and indeed on practically all sectors, are three dimensional   as follows:  sharp depreciation of the currency depreciation over the last one year, liquidity crisis in the foreign exchange market, which manifests in the acute shortage of foreign exchange in the official window and volatility of the exchange rate which creates considerable uncertainty and unpredictability for investors.

According to him the depreciation Impact on the Real Sector and the SME include high cost of production because of the high import dependence of our manufacturing sector for imported raw materials, low sales and turnover because of the increase in price and effect on demand,erosion of profit margins because not all the additional cost can be passed on consumers. and increases business continuity risk for some segments of manufacturing.

Speaking on the impact of forex liquidity challenges Yusuf said  it “is about the availability of forex to investors in the economy,” adding that   “this has also been a major challenge to investors in the economy, including the real sector investors.”

According to him  its effects are  as follows :  it makes planning difficult because of the uncertainty, profit or dividend repatriation becomes difficult, creating huge backlogs, it compels investors to patronise the parallel market at a more prohibitive exchange rate,patronage of the parallel market creates compliance and regulatory issues for investors, capacity utilisation is impacted when access to forex is constrained and poses a risk to business continuity.

Exchange rate volatility  worsens uncertainty for investors including the SMEs, undermines investors’ confidence, makes planning difficult and heightens investment risk.

Dr. Yusuf said  “in the bid to reduce the pressure on foreign reserves, the(Central Bank of Nigeria ) CBN had excluded over 40 items from access to foreign exchange in the official window. Some of the products on this list are intermediate products for some manufacturing firms.

“ This had some degree of negative effects on some manufacturing firms.  It would be advisable for the CBN to have a robust engagement with the stakeholders to review this list.”

For solution the problems he said “ 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. 

“In order to promote better theoretical understanding, it would be useful to define these concepts.  Devaluation is a policy choice often adopted to boost export and discourage imports.  Countries adopt this measure, not necessarily because they have a foreign exchange or balance of payment crisis; but as 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. The benefits of a flexible exchange rate model are as follows:

i.              It enhances liquidity in the foreign exchange market.

ii.             It reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors.

iii.            It is more transparent as mechanism for forex allocation.

iv.           It minimizes discretion in the allocation of forex.

v.            It reduces opportunities for round tripping and other sharp practices.

A fixed exchange rate regime on the other hand creates the following outcomes:

i.              Widening gap between the official and parallel market exchange rates.

ii.             Collapse of liquidity in the foreign exchange market resulting in acute scarcity.

iii.            Mounting trade debts.

iv.           Increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs.

v.            Many investors are not able to meet offshore obligations.

vi.           Mounting inflationary pressures

vii.          Sharp drop in capital inflows

In the light of the foregoing, the following policy options could be explored to mitigate the current crisis:

i.              Adoption of a flexible exchange rate regime.  This would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence.

ii.             Deepen the autonomous foreign exchange market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational Companies, Donor Agencies, Diplomatic missions etc.  Market rates should be allowed to prevail in the autonomous window.

The Nigerian economy has the capacity to weather the current turmoil if the policy contexts are right.  We have the market, the people and natural resources. The opportunities that the present situation offers would only be realized if policy obstructions to resource flows are removed.