Nigeria: Unified Exchange Rate May Trigger Inflation - Central Bank

Nigeria naira

Lagos — Amid persistent demands for a unified exchange rate, the Central Bank of Nigeria (CBN) has warned that if adopted, the measure could trigger another spike in inflation.

The apex bank said that the most realistic approach is structural reforms to strengthen the current arrangement.

The CBN position came up at a dialogue with the theme: "Policy Change- the Enabler of Sustainable Growth," which was organised by Financial Derivatives Company in Lagos yesterday.

CBN director, Monetary Policy, Moses Tule, noted that the policies of the apex bank had helped checked inflation from the over 18 per cent which it was a few years ago.

In cross-country analysis, Tule stated that advanced economies in "the past had administered a stream of incentives to critical sectors of the economy in form of subsidies" and stressed the need to put in "place requisites infrastructure and make things correct before removing multiple currency practices.

"What is wrong if we give preferential treatment to the importers of oil so that they get oil at a certain exchange rate of N305, and then deliver it to Nigeria at a certain price so that it does not extend or transmit into inflation?

"We had the shock on inflation in 2016 and it was not driven by monetary forces; it was triggered by three key factors: There was a change in oil price, there was re-pricing of electricity tariffs, and there was the depreciation of the currency.

"All these fed the inflation, so if we had inflation rising up to 18 per cent it was not driven by monetary factors but by reform factors which were necessary for the economy.

"If we have a temporary exchange rate regime that seeks to achieve the long-term target of inflation, it can solve the current problems because monetary policy addresses current problems and in the long-run we expect that fiscal policy will take care of the structural issues," he said.

According to Tule, "the International Monetary Fund (IMF) tells us that because of multiple currency practices there is trade deficit, there is high inflation and slow growth. It means slow growth comes as a result of exchange rate misalignment, it means inflation is because of exchange rate misalignment, it means structural deficit is because of exchange rate misalignment.

"In 2012 and in the midst of the global financial crisis, the IMF agreed that going forward there is need to look at countries relative to the condition in which those countries are, but now that we are out of the crisis, the IMF has gone back to textbook economics.

"How long ago did the Fund when we introduced the 41 items say this is not acceptable and we had a running battle with the IMF but eventually they had a recourse and said we have agreed that you have made some major progress and we agreed and said we can do better and we are working towards doing much better," he added.

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