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Nigeria’s forex system ‘a disaster waiting to happen’, says CBN ex-governor Soludo


Charles Chukwuma Soludo

The foreign exchange regime in Nigeria is a recipe for disaster. This is the view of Charles Chukwuma Soludo, a former governor of the Central Bank of Nigeria (CBN). CNBC Africa’s Onyi Sunday caught up with him at the recently concluded AFC infrastructure summit to discuss Nigeria’s economy and its forex policy.

The recession is a cyclical trend that is inherent in the market economy framework, Nigeria will surely get out of the recession and once you have the oil sector beginning to have some recovery in terms of price and quantity we will be out of recession. That will follow as day follows night.

When we talk about the recovery it tends to hinge it on the oil price. What happens if it crashes again?
You took the words out of my mouth. My point is that, we will get out of the short term one, which is cyclical. In other words if you take ten steps back and take 4 forward you have recovered. That is what it means, because you’ve gone down, so if you step a little bit further you’ve recovered, but that is the easier part. The more fundamental part is that the economy has compressed magnificently in dollar terms. Before the recession this was a $ 550 billion economy, now depending on the exchange rate that you use, we’re probably between a two hundred and something and a three hundred and something billion dollar economy. What it takes to get out of a massive compression that’s a different thing.

Would you care to comment on the CBN’s forex policy so far?
Quite frankly, Nigeria went into a recession. There’s no question that we had an oil shock in both output and price but the forex policy accelerated Nigeria’s descent into a recession. It was avoidable, it was the fault of the policies that we put into place. I gave a lecture in 2015 where I said that Nigeria would get into a recession if we continued the way we were going. When you have a terms of trade shock you can’t fix nominal variables. If you fix nominal variables, then the real variables will readjust and that’s the real sector and that’s exactly what has happened, employment and output have readjusted with a vengeance and so Nigeria went into an avoidable recession. Now the uncertainty in the market is chaotic. The premium that you have is so distortional and the cost of the uncertainty has damaged confidence. Confidence is not like a tap that you switch on and off. If investors have switched off today then tomorrow you come and switch them on.

It is not like that. There are some panicky measures being taken because the parallel market overshot N520 to the dollar. The situation was politically unsustainable and so everyone went on to do the panicky thing. Everyday you hear an announcement. “We’re intervening here, we’re intervening there.” That’s not it. We need a systematic framework and a policy that people can see through, but you still have a more than 25% premium between your official and some of the other markets. All kinds of windows and people are trading in all kinds of arbitrage and there’s all sorts of rent seeking going on and you want to diversify the economy? It won’t happen with this kind of regime. It’s just not sustainable, no country has diversified competitively or industrialised competitively with the kind of multiple, chaotic, exchange rate regime that we have. It is a recipe for disaster. It just doesn’t work.

So whereas some of the panicky measures have brought some semblance of stability in some rates. I have said it repeatedly that the Central Bank should stop playing politics with foreign exchange in the market. You come and fix all these multiple windows. It is nothing but politics. You need a systematic policy that investors can see through the framework that you’re implementing.

What do you recommend?
Eliminate the multiple foreign exchange practice. I did it as the governor of the central bank. In 2006 I started a regime to do that and for the first time in Nigeria’s history, the parallel, the official and all the markets came down to within a 1-2% band. That’s what you need! And you see what happened in the economy subsequently. So it isn’t something we’re going to invent the wheel on. Take off all of these arbitrary distortions that have been put in place. We understand why they have been put in place but that’s for another day.

You’re the expert here so help me understand this. There are actually just two terms here so what are you trying to say. Are you calling for a float, or are you saying that the CBN should continue with it’s managed float but this time, with a tweak in policies. Which is it?
When people talk about free float, it depends on what they mean. In a regime where the Central Bank is the dominant supplier of FX, free float requires deeper understanding. The central bank will continue to intervene in the market because it is the dominant supplier of FX in the market. It is not a perfectly competitive market, no, but what is evident is that the Central Bank can tomorrow eliminate the monetary policy practice and let the market operate the way that it should. For example if the Central Bank wanted to have a competitive, effective, exchange rate regime, that is the frame work of the regime. So if you want to have a competitive market exchange rate, the key thing you actually have to aim for is stability. It is not the level. The level can be important but what is more dangerous for the company is the volatility. They want stability, they want predictability, they want a framework to be able to do that. You’re not going to achieve it with this multiple thing. You come and fix one thing at 305, fix another at 360 fix the other one 380, leave the other one to operate by Demand and Supply importer exporter window. You can’t!

Eliminate everything and have one window. If it is the interbank let it operate and let it be. And then you modulate the supply to the market, depending on the level at which you want it to stabilise. And I have no question that it’s only a matter of time before the central bank does that. They’ll do it because there’s little choice. The cost to the economy of this day by day kind of thing is very expensive to the economy, and the economy cannot afford it.

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