Nigeria’s foreign exchange crisis has been widely attributed to the monolithic model that characterizes Nigeria’s oil-dependent economy.
While successive administrations have made endless speeches about diversification, little success has been recorded in this regard.
The challenge of foreign exchange (forex) in the economy has been recurrent over the years despite the efforts of the federal government and the reasons are fundamental and obvious. The Nigerian economy is monolithic in structure, with oil accounting for 90% of exports, 25% of gross domestic product and 80% of government revenue.
According to United Capital Plc, in 2021, following mounting pressures on the country’s reserves in the first nine months of the year, several positive developments in the fourth quarter (Q4) 2021 helped to strengthen the gross reserves position of the Central Bank of Nigeria, including debt. Issuance by the Management Office (DMO) of $4.0 billion in Eurobonds, allocation of SDRs by the International Monetary Fund (IMF) and rising oil prices. Overall, external reserves increased by $5.2 billion in 2021 to close at $40.5 billion in December 2021, a 14.5% increase from December 2020.
He added that “However, in recent months, external reserves have faced renewed pressures as the country’s import bill has continued to climb, especially in the face of global inflationary pressures, which has led to a spike in the cost of import of key commodities (such as PMS, foodstuffs and other raw materials).
The CEO of the Center for Promoting Private Enterprise (CPPE), Dr Muda Yusuf, said: “In the context of the challenges facing investors in the foreign exchange market, the CPPE calls for an urgent review of the regime current exchange rate policy.
“Our proposal is that we should adopt a flexible exchange rate policy regime. We would like to clarify that this is not a devaluation proposal. Rather, it is a pricing mechanism that reflects the fundamentals of supply and demand in the forex market. It is a sustainable, predictable and transparent model. It is a policy regime that would reduce uncertainty and inspire investor confidence. It is a policy framework that would minimize discretion and arbitrage in the currency allocation mechanism.
He noted that a flexible exchange rate regime is a policy choice adopted to deal with changing demand and supply conditions in the foreign exchange market, saying that a market rate would also deepen the autonomous foreign exchange market thanks to the liberalization of flows from export earnings, diaspora Remittances, multinational companies, donor agencies, diplomatic missions, among others.
Experts from United Capital pointed out that “obviously the CBN is under great pressure, which became evident in its recent foreign exchange policies where it decided to ration the supply of foreign exchange to prioritize manufacturing companies that support its objective of import substitution”.
To solve Nigeria’s persistent foreign exchange problems, he said, the long-term solution is to build our productive capacity to reduce import dependence and increase product supply to the international community to to increase foreign exchange income.
He said, however, that to achieve this, significant fiscal and regulatory interventions will be needed to make the operating environment conducive for business to thrive, saying that in the short term, the CBN’s quick fix would be to attract new business. speculative money in the economy. , a move that would imply another currency devaluation and higher interest rates.
The experts said that “on foreign trade, data at the end of the third quarter of 2021 shows persistence in Nigeria’s negative terms of trade which stood at N8.8 trillion; this reflects total exports worth N13.1 trillion against N21.9 trillion in total imports. It is pertinent to note that such enormous deficits have been rare in the history of our country’s terms of trade.
He noted that the private sector recognizes the increased pressure on the government to generate foreign exchange and consolidate foreign exchange reserves, saying that it should be noted that one of the government policies to achieve this has been the management of foreign exchange policies. exchange.
He advised the government to look to non-traditional sources of foreign exchange such as foreign direct investment and remittances from the Nigerian diaspora. Additionally, the boom in remote work and huge demand for tech products has seen explosive growth in Nigeria’s startup ecosystem, therefore, we want the government to support this sector with the right policy environment, as it has the potential to be one of the highest sources. currency for the country.