Exchange rate unification is not a silver bullet
The exchange rate unification policy implemented last month, has addressed significant distortions in the forex market. The IEFX rate is currently trading at N818/$, a depreciation of 42.3% from N471.67/$ before the policy pronouncement. The premium between the official and parallel market rates has also thinned out to -N3/$ from N275/$ in January.
While many analysts regard ditching the system of forex rationing and administrative control by the CBN as a step in the right direction, the big question remains, “Is exchange rate unification a silver bullet that addresses Nigeria’s currency crisis?”
Since gaining independence in 1960, Nigeria has experimented with several exchange rate management schemes, but the country’s exchange rate problem persists. This implies that exchange rate management goes beyond the adoption of one regime or another.
Achieving exchange rate stability requires a combination of sound macroeconomic policies, effective management of external risks, and management of forex demand and supply fundamentals. In other words, exchange rate unification is not an end but a means to achieve a stable, transparent and efficient forex market. To this end, monetary authority must prioritize increasing FX supply in the short to medium term.
No drain, no gain: The importance of diaspora remittances
Millions of Nigerians migrate to other parts of the world in pursuit of a better living. While emigration contributes to brain drain, Nigeria can turn the drain into gain. With dwindling revenues and growing government budgetary pressures, diaspora remittances can unlock massive economic value in the country. This is because diaspora remittances have proven to be more resilient than other types of investment inflows in the face of domestic and global volatility.
Nigeria’s diaspora remittances in 2022 ($19.8bn) remained below the peak of $23.8bn in 2019. This indicates that more efforts must be made to attract inflows from Nigerians in diaspora to boost government revenue and support the government intervention efforts through increased forex supply. Countries like Mexico, India and Korea are worthy emulation for Nigeria.
In this edition of the FDC Bi-monthly bulletin, the FDC Think Tank unpacks these issues and more, providing their economic implications.
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