THE ECONOMY AND FOREIGN EXCHANGE DYNAMICS

Despite CBN’s efforts to boast about currency inflows, fundamental challenges remain, writes Arize Nwobu

The exchange rate is the price of one currency against another and is the backbone of international trade. It helps determine the health of an economy and the well-being of citizens through the volume and ratio of imports and exports. A country’s exchange rate is determined by its foreign exchange earnings and external reserves, and a number of variables interact in currency dynamics.

Import-export activity influences exchange rates and other critical parameters such as inflation, interest rate, trade surplus or deficit and GDP. Weak exchange rates favor foreign exchange inflows and imports, while a high exchange rate and a strong national currency hinder exports, which in turn hinder foreign exchange inflows.

Recently, Nigeria’s exchange rate has taken a turn and caused concern but unnecessary criticism against the Central Bank of Nigeria (CBN). All of this was unnecessary and unjustified because we need to be clear about certain fundamentals of the economy.

Although it is the primary duty of the CBN to formulate monetary policies to stimulate the economy, there are also fundamental and outlier factors inherent in the economy that tend to hinder the effectiveness of certain policies aimed at stimulating inflows. energy and pushing the frontiers of the economy. economy.

And until these fundamentals are holistically restructured, we may continue to see periodic fluctuations in the exchange rate and satisfy rather than maximize the potential of the economy.

It is undeniable that the economy is factor driven and monolithic. Oil accounts for more than 80% of foreign exchange earnings, a development that easily exposes the economy to shocks.

The economy is also largely dependent on imports. Usually large scale import is good because it indicates that an economy is robust. It also offers citizens a wider choice of products, even at cheaper rates.

But this becomes problematic when not matched by a robust manufacturing base, exports and other services such as tourism that promote foreign exchange inflows. This is the fundamental challenge of the Nigerian economy.

It was reported that the economy recorded the highest import bill of 6.85 naira in 12 years with an increase of 54% during the first quarter (Q1) 2021. And the trade deficit stood at 5.81 trillion naira in the first half (H1) of 2021. .

Other notable challenges in the economy include what development economists call the “original sin” pledge which is a nation’s inability to issue debt in local currency and reliance on primarily external grants and concessional loans to finance public deficits and capital expenditure. and which are said to tend to transfer currency risk to clients.

The CBN has been aggressive in formulating policies to manage the demand and supply side of the intractable foreign exchange challenge. Some of the policies such as the banning of 41 items from the interbank foreign exchange market and the creation of the FX window of importers and exporters (I&E) had reasonable impacts until the situation was exacerbated by the COVID-19 pandemic which drove down the price of oil. and distorted the trajectory and dynamics of the economy.

Going forward, the bank has introduced the dollar to naira policy to boost inflows. The policy offers a rebate of N5 for every dollar of funds remitted to Nigeria. While some analysts were optimistic it would impact inflows, others believed it would not.

In a news article, Professor of Economics at Olabisi Onabanjo University, Sheriffideen Tella, noted that “it will not have a major impact on diaspora remittances.” According to him, “the first thing is that the amount (N5) is too small to entice those who live abroad to start sending money home”. to more than $30 million per week through the Bank’s foreign exchange initiatives.

Overall, the apex bank has initiated notable policies aimed at pushing the frontiers of the economy. But until the fundamental challenges are comprehensively overcome through the concerted efforts of fiscal and monetary authorities and key stakeholders and institutions, we can continue to meet rather than maximize the economy’s potential.

Nwobu is a licensed stockbroker and business journalist based in Lagos