Impact of Forex Crisis: Dr Muda Yusuf Advocates Adoption Of Flexible Exchange Rate Policy

The Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE) and former Director-General, Lagos Chambers of Commerce and Industry (LCCI), Dr Muda Yusuf, has advocated for the adoption of a flexible exchange rate policy regime.

According to him, adoption of a flexible exchange rate regime would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence and deepen the autonomous foreign exchange market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational Companies, Donor Agencies, Diplomatic missions etc and advised that Market rates should be allowed to prevail in the autonomous window.

He made the advocacy while delivering the theme paper entitled “Impact Of Forex Crisis On The Real And SME Sectors,” at the 2021 edition of the Commerce and Industry Correspondents Association of Nigeria (CICAN, conference held in Lagos recently.

He said “The sharp depreciation of the naira exchange rate in the parallel market remains a cause for concern.  It is 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.

“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.”

Dr Yusuf explained that a flexible exchange rate regime on the other hand is adopted to cope with changing demand and supply conditions in the forex market.

He listed the benefits of a flexible exchange rate model to include enhancement of liquidity in the foreign exchange market; reduction of uncertainty in the foreign exchange market and therefore enhances the confidence of investors; it is more transparent as mechanism for forex allocation; it minimizes discretion in the allocation of forex and reduces opportunities for round tripping and other sharp practices.

He said “A fixed exchange rate regime on the other hand creates the following outcomes: widening gap between the official and parallel market exchange rates.; collapse of liquidity in the foreign exchange market resulting in acute scarcity.; mounting trade debts; increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs; many investors are not able to meet offshore obligations; mounting inflationary pressures and sharp drop in capital inflows.

“In the light of the foregoing, the following policy options could be explored to mitigate the current crisis: adoption of a flexible exchange rate regime.  This would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence and 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.”

He said “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.”