Nigeria’s Exchange Rate Strategy Discourages Investors, Increases Inflation- WORLD BANK 

The World Bank has said that Nigeria’s exchange rate management policies are discouraging investments and fuelling inflation in the country. Information Guide Nigeria

According to OSG, this was disclosed in the Bank’s November edition of its Nigeria Development Update.

OSG reports that while highlighting the role of the Central Bank of Nigeria in exchange rate stability, the World Bank said there had been intense pressure on the naira, with the CBN constantly raising the nominal official exchange rate.

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According to the bank’s Nigeria Development Update, CBN’s foreign exchange management system was too rigid, with the system driving inflation in the country.

OSG reports that parts of the report read:

“The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.

“Pressure on the naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 per cent in March 2020, five per cent in August 2020, and seven per cent in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation.”

According to OSG, the report stated that CBN was yet to introduce flexibility into FX management to sustainably respond to external shocks, adding that the NAFEX rate was not a true reflection of the market rate.

“While the CBN supplied an average of $2.5bn to the Investors and Exporters forex window in the months just prior to the COVID-19 crisis, it only supplied an average of $0.5bn in the months thereafter. Jamb Result

“The NAFEX rate, which is now the guiding exchange rate for the economy, continues to be managed and is not fully reflective of market conditions. The parallel market premium over the NAFEX rate reached 29 per cent in August 2021 after the CBN cut off its weekly supply of $20,000 per bureau de change. The CBN has intermittently supplied forex to BDCs since 2005, providing ample opportunities for currency round-tripping.”

OSG reports that the World Bank has advised that a more predictable, transparent, and flexible foreign exchange management system should be adopted to attract and sustain private investment flows.

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