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Fixing Nigeria’s forex crisis – Financial experts weigh in

Nigeria’s foreign exchange market has been under significant pressure recently, leading to a depreciation of the naira and concerns about economic stability.

The naira’s recent depreciation has been attributed to a combination of factors, including increased demand for dollars, rising inflation, and concerns about the global economic outlook.

To address these challenges and stabilize the exchange rate, the Central Bank of Nigeria (CBN) has implemented various measures, including raising interest rates and restricting access to foreign exchange. However, the effectiveness of these measures remains to be seen.

To address this challenge, financial experts interviewed by TheTimes exclusively noted that a multi-pronged approach is necessary, encompassing measures to boost domestic production, enhance market confidence, and implement sound fiscal and monetary policies.

They noted that a crucial step towards alleviating the forex demand is to enhance domestic production, particularly in the petroleum sector. This involves enabling private and public refineries to operate at full capacity, reducing reliance on imported petroleum products.

Additionally, fostering domestic manufacturing and agriculture will further reduce the need for foreign exchange to acquire essential goods.

What the financial experts are saying

The Executive Vice Chairman, of Hicap Securities Limited, Mr David Adonri also in an exclusive chat with TheTimes said the government should enable private and public refineries to work

He noted that the major cause of the imbalance is pressure from the excessive importation and the major part of the importation is petroleum products imports.

  •       “Hopefully when Dangote and public refineries start producing, then the massive importation of petroleum products will ease the pressure of the forex exchange market,” he said.

Adonri called on the government to enhance the security network to facilitate domestic production to reduce import dependence and pressure on the naira.

  • “Because the cost of depreciation of naira is the scarcity of hard currencies, then in the medium to long term, the restoration of securities and increase in domestic production will also ease the pressure on the foreign exchange market. This will enable the naira to regain ground,” he said.

According to him, the government should also roll out other appropriate fiscal measures to close the supply gap in the economy.

  • “They should understand that further use of monetary policy measures cannot rein in inflation because they have reached their limits as demand management strategies.
  • Now that the monetary policies which are demand management strategy can no longer rein in inflation, then the only option left is the deployment of fiscal policies and actions,” he said.  

Speaking on the effect of currency speculators, Adonri said there are speculators in every deregulated economy and that the speculation is caused by scarcity.

  • “Once that scarcity is eliminated, speculation will suffer heavy losses that will serve as a market-based deterrent and disincentive for further speculation. That is an attribute of the market based on supply and demand. 
  • The government should not use administrative methods to discipline speculators in the market, they should allow the normal market design to take its cause rather than imposing discipline on speculators,” he said.

The former President and Chairman governing council of, the Chartered Institute of Stockbrokers (CIS) and the Managing Director, of Arthur Steven Asset Management Limited, Mr. Olatunde Amolegbe also in an exclusive chat with TheTimes said for the exchange rate to be stable, market and participants confidence is key.

  • “Confidence is what makes foreigners want to come to invest in your country and make locals want to keep their investments here.
  • In the absence of these dynamics, demand will naturally outstrip supply and you see the sort of instability we are experiencing now. 
  • I think the decision to clear FX commitment backs will be positive for market confidence, but the desired impact might manifest in the medium term rather than in the short run.
  • I also think the efforts at using monetary policy tools to reduce system liquidity could ultimately reduce currency speculation but again it’s not a silver bullet. 
  • Deliberate efforts need to intensify at effecting structural changes that will encourage import substitution such as improved security, better infrastructure increased foreign direct investments, and encouraging local production,” he said.

Tajudeen Olayinka, CEO of Wyoming Capital and Partner, said the foreign exchange market, like any other market around the world, has a demand side and supply side, the same way the economy as a whole has a demand side and supply side.

Olayinka noted that when there exists intense pressure on the market from the demand side, the supply side will need to adjust itself to meet the surge in demand.

  • “This process continues until the equilibrium exchange rate is achieved. Where the government is seen to deliberately manipulate the exchange rate, then there will be no equilibrium exchange rate in the market, and so, an unofficial market or black market would evolve to satisfy the desires of different players to have foreign exchange transactions and other non-foreign exchange transactions delivered at an equilibrium exchange rate, thus, creating exchange rate divergence. 
  • The resultant divergence would force the official supply side to continue to disappear, creating a liquidity challenge for the market. 
  • This was the problem we found ourselves in before the unification policy of the current administration. Regrettably, the persistent exchange rate divergence and the resultant liquidity challenge have forced the critical supply side players to disappear from the market, and by extension, the economy,” he said.

On what should the government of President Bola Ahmed Tinubu do, Olayinka noted that the only course of action to remedy the current situation is to reset the economy through a comprehensive adjustment program.

A comprehensive adjustment program is designed to correct disequilibria between aggregate domestic demand and supply where macroeconomic imbalances exist.

  • “This program must be driven by adjustment experts who understand the dynamics of the adjustment program. 
  • The essence is to move the economy towards attaining internal equilibrium, while also trying to restore external equilibrium. 
  • The government started without a blueprint of how and when the program should commence. Adjustment Program is not a tea party and cannot be implemented with mere pronouncement. Thankfully, we still have a way out,” he said.

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