CBN EXCHANGE RATE POLICY: MANAGED OR FREE FLOAT?

CBN EXCHANGE RATE POLICY: MANAGED OR FREE FLOAT?

The Naira has declined to unseen lows since the Exchange Rate policy came into effect, May 30. Inflation has also skyrocketed following the fuel subsidy removal took effect around the same time.

The Naira closed on August 1 against the Dollar at N756.93 on the official market and 875 on the parallel market establishing a spread of N118.07. The @cbn needs an appropriate policy on exchange rates as it is is crucial for price stability and growth.

Exchange Rate stability is essential for any developing economy as and it affects local prices just as price changes in goods and services priced in foreign currencies. 

The management of foreign currency is important for monetary authorities because stable currency exchange rate affect prices levels. Exchange Rate Stability is determined by factors that affect ongoing demand (for Foreign Currency) relative to supply. 

The local currencys exchange rate could remain relatively low if;

1. The source of foreign receipts is narrow or concentrated in one commodity (as in Oil for Nigeria)

2. The Import demand for goods and services stays consistently higher than Export Supply of it's locally produced goods and services 

3. Capital outflows outweigh capital inflows. (That is if debt servicing, and capital repatriation exceeds government revenue, new debt financing, Foreign Direct Investment in the private sector).

A Managed Float: 

The President's advisor on monetary policy, Wale Edun argued that for a country that has revenue in excess of $100 billion dollars annually, exchange rate should be stable and inflation kept under control.

This is however not a given as there are due to foreign currency demand pressures from both the private and public sectors. With a narrow source of FX earnings, and a considerable amount of debt servicing, a Central Bank operating on a Free Floating Exchange Rate Policy would leave the currency in free fall and exposed to external shocks.

A Managed Float Regime is recommended for Nigeria. A system where the official rate is allowed to float at a predertemined spread.

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