The Nigerian government has taken several policy decisions in the last 18 months, mainly the removal of fuel subsidies and the floating/unification of the exchange rate, with subsequent serious consequences on the purchasing power and welfare of the people.

Given the dependence on fuel imports due to the erosion of local refining capacity over several years, the effect of the removal of fuel subsidies (either partially or fully) has led to significant increases in fuel prices at the pump, with dire consequences for population, more from the impact of currency devaluation. than the removal of the subsidy itself.

• Even with coming on board Dangote Refinery, Expectations of a pump price cut and relief to citizens have dimmed given the recent pump price hikes heralding the start of operations by the refinery.
• This is still being traced to the high exchange rate despite the idea of ​​selling crude oil at the refinery in Naira because the underlying business transactions, even in Naira, are essentially still compared to the dollar equivalent value of a barrel of crude oil on the international market, where it is traded in dollars.
• There is a well-established correlation between the exchange rate and domestic inflation, especially in Nigeria. So as long as the exchange rate remains high, inflation will be high and the Central Bank of Nigeria (CBN) focusing on price stability and inflation management as its core mandates would do what it deems necessary to reduce inflation.
• For the current CBN regime, this has been through a determined focus on the inflation targeting mechanism using the interest rate tool, that is the monetary policy rate, which has been significantly increased by 850 basis points from the first quarter of this year 2024.

Against this backdrop, I had a discussion with some colleagues recently, and the main thrust of my statement was that, given the results of recent decisions and the centrality of the exchange rate to our national life, it may be necessary to pause and we reflect even when I have “Stay the course.”

Some of the points are highlighted below:

1. The decision to float and unify the exchange rate may have achieved one of its goals of (almost) unifying the official and parallel market rates to reduce the arbitrage that was until now a major problem and even existed a relative stability in the last couple. for months.

However, at over N1,600, the exchange rate is still very high because the naira is undervalued compared to other African countries (at least in terms of the degree of devaluation against the dollar in the last 18 months) and also , initial projections of the equilibrium exchange rate around N600-N700 by government officials and representatives (eg Minister of Finance and Economic Planning, CBN Governor, Chairman of the Presidential Committee on Fiscal Policy and Fiscal Reforms) at different times in 2023.

The key problem remains the inadequate supply of foreign exchange or accumulation in reserves. It is therefore imperative that we significantly increase the supply of foreign exchange given the low oil production (below budget and OPEC quota) resulting from continued oil theft, pipeline vandalism, insecurity and poor infrastructure because we cannot provide what we do not have , i.e. FX.

Even the argument that devaluation would be beneficial for exports due to the expected competitiveness of such exported products in the international market is challenged by low oil production. This is exacerbated by the fact that our economy is essentially mono-product dependent on crude oil.

2. Still on the foreign exchange bid, the recent issuance of domestic dollar-denominated bonds was reported to be 180% oversubscribed, but there has been no significant impact on the exchange rate yet.

When the idea of ​​the bond was initially mooted, a key concern in some quarters was that while the bond would encourage locally based Nigerians to withdraw dollars from their home accounts and “under the pillows”, would equally encourage significant demand for FX from other locally resident Nigerians who would convert Naira into dollars to participate in the bonds thereby creating distortions.

We cannot justifiably discourage the dollarization of the economy in one breath and in another by encouraging the same. This informed the suggestion of possibly restricting the bond to only Nigerians in the diaspora and marketing it aggressively as such, but it was eventually floated, making it open to all, including locally based Nigerians.

Given the limited impact of oversubscription on the exchange rate so far, a scoping review may be needed to determine whether another tranche should continue to focus on all Nigerian residents, both in-country and from abroad, or should they focus only on Nigerians in the diaspora and other international investors. .

And also to generally review the learning points of the bond to achieve the desired objectives of increasing the supply of fresh currency and depressing the exchange rate.

3. As mentioned earlier, there is a clear correlation between the exchange rate and domestic inflation/high prices. We have seen this over the last 18 months. Although we could say that the rate of inflation growth has reduced, is reducing or stabilizing, the inflation rate itself remains unprecedented.

So, given the CBN’s dogged recourse to orthodoxy in managing inflation, we must consider when to end monetary policy rate (MPR) hikes or even consider reducing the MPR to facilitate lower interest rates that have remained unusually high (due to high RPM) thereby stifling access to credit for the real sector or providing very expensive access to credit, leading to a sustained high cost of goods, keeping inflation high and hampering economic growth.

Without a floor to rein in interest rate increases, might we not inadvertently defeat the original objective of inflation management?

• In conclusionthe forecast of the exchange rate in the next six months to a year will be determined by decisive measures to be taken to significantly stimulate the supply of foreign exchange on the one hand and on the other hand by the expected considerable reduction in the demand for foreign exchange resulting from refining local. of petroleum products. If the latter does not happen, then what would be the point of having a local refinery with such a capacity?
• These, along with other fiscal measures/fiscal policies recently released for implementation, should be given particular attention to the need to review the extent to which interest rate increases can still be used to manage inflation, as well as improving communication and engagement with citizens .
• The preceding issues point out that while the Government must “stay the course” In terms of overall objectives, he must surely stop and reflect at this point on the component steps to ensure that he is able to ultimately deliver the desired value to the generality of Nigerians who are currently at the highest threshold of resistance!

This article is contributed by Hafiz Bakare, a consultant and former bank executive.

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