Emefiele: Nigeria’s FX Policy Targeted at Preserving Naira Value, Others

•Non- Convertibility Of Currencies Pose Challenge For FX Management, Says WAIFEM DG

The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, yesterday said the objectives of the country’s exchange rate policy were to preserve the value of the domestic currency and maintain a favourable external reserves position.

Emefiele stressed that the central bank’s foreign exchange (FX) regime further seeks to ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.

The central bank governor also said the overarching goals of the apex bank includes to achieve exchange rate stability that ensures a viable external sector, anchor inflationary expectations and improve and support economic growth.

The CBN governor who spoke at the opening of the Regional Course on Exchange Rate Regimes and Policies, organised by the West African Institute for Financial and Economic Management (WAIFEM) with participants from Nigeria, The Gambia, Ghana, Liberia and Sierra Leone in attendance, also said the thrust of exchange rate management by the bank was to allow the market system to determine the exchange rate parity in an efficient manner devoid of the activities of speculators and rent-seekers.

He pointed out that the bank’s choice of exchange rate regime had at all times been determined by the prevailing economic fundamentals, adding that it was not uncommon that the dynamics of the external and domestic economy lead to a change in regime.

He said indeed, global economic and financial crisis, pandemics, currency crisis, commodity supply shocks and geopolitical tensions to name a few determines the choice of exchange rate regime.

The bank currently operates a free-float regime, whereby it intervenes in the market whenever necessary.

Emefiele, specifically noted that for developing economies including Nigeria where the demand for imports remained high, an appropriate exchange rate regime was required to safeguard capital outflow and ring-fence the external reserves.

Represented at the capacity building course by the CBN Deputy Director, Monetary Policy Department, Mrs. Omolara Duke, Emefiele further explained that the choice of an exchange rate regime by a country was largely dependent on the assessment of its specific macroeconomic objectives, state of economic development and the focus of its foreign exchange policy.

He said, “For the advanced economies, the exchange rate regime galvanises towards the floating regime, as the majority of them have convertible currencies and are therefore less exposed to the vagaries of currency fluctuations.

“Developing economies are more cautious towards protecting their economies from adverse movements of convertible currencies which they trade with and therefore avoid regimes that will expose them to speculative attacks and currency crisis and desire to promote long-term growth.”

He added, “The choice of their exchange rate regime consequently tilts toward preventing massive capital inflows and currency crises and promoting trade.

“The choices of an exchange regime that will achieve exchange rate stability, capital mobility, and independent monetary policy simultaneously often leave a decision to achieve two out of these three outcomes. An exchange rate regime, therefore, must be credible and reflect the underlying fundamentals of the economy.

“Countries rarely take the extremes of the regimes, that is the fixed or the free-floating except in certain cases. Most countries exhibit some control over their currencies within the broad spectrum of the two extremes.”

Emefiele, nevertheless said the bank had undertaken various initiatives to support the diversification of the Nigerian economy from the reliance on crude-oil export as a major source of foreign exchange, adding that the CBN development finance initiatives provide credit for the real sector to stimulate domestic production, particularly in the agriculture and industrial sectors that have huge potential to earn foreign exchange.

He said a major goal is to reduce the pressure on the domestic currency adding that since the inception of the CBN in 1959, the bank had undertaken many exchange rate management regimes – each with its challenges and success.

However, Director-General of WAIFEM, Dr. Baba Musa, said the fact that all currencies in WAIFEM member-countries are non-convertible raises the need for policymakers to appreciate the skills necessary to manage exchange rates.

He said the reasons justifying the concentration of attention on exchange rate were not farfetched as exchange rates affect cross-border economic transactions.

According to him, trade, investment, finance, tourism, and migration, among others are profoundly influenced by international monetary policies, adding that as economies become globalised more firms, investors and workers find their fortunes linked to the exchange rate and its impact on trade and financial flows.

Musa said governments in several developing countries governments have searched for alternatives to the uncertainty that could prevail on international currency markets, and rushed to peddle currency nostrums, urging a turn toward dollarisation, managed floating, nominal anchors, target bands, or other options.

According to him, there are both theoretical and empirical reasons to expect globalisation to heighten the importance of the exchange rate.

He said, “Theoretically, open-economy macroeconomic principles imply that capital mobility profoundly affects exchange rate policy choices. As a result, the government of a financially integrated economy faces a choice between monetary policy autonomy and a fixed exchange rate.

“If governments opt for a fixed rate, capital mobility makes impossible a monetary stance different from that of the anchor currency.

“Alternatively, if governments opt to sustain an independent monetary policy, they must allow their currencies to float. These constraints mean that the economics and politics of monetary and exchange rate policy are likely to be very different in an open economy than an economy that is not.”

Musa said in as much as international economic integration involves increased exposure to international financial and commercial flows, it heightens concerns of those involved or exposed to international trade and finance.

Nonetheless, he noted that all the currencies in WAIFEM member-countries are non-convertible hence the importance for policy-makers to appreciate the skills necessary to manage exchange rates.

He said the institute was established by the central banks of The Gambia, Ghana, Liberia, Nigeria and Sierra Leone in 1996, principally to build capacity for improved macroeconomic and financial and debt management in the constituent member countries.

He said WAIFEM has the mandate to conduct research and consultancy in the area of macroeconomic policy management and promotion of best practices, adding that so far, the institute has successfully executed over 828 courses since inception, benefitting more than 23,122 participants from the sub-region and beyond.

Essentially, the institute seeks to develop, on a sustainable basis, expertise in the fields of macroeconomics, debt, financial sector management as well as governance and institutional development among the staff of central banks, ministries of finance and economic planning and other public sector agencies with core economic management responsibilities.