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Sanusi Wants Flexible Exchange Rate System Fully Implemented

The Emir of Kano and former Central Bank of Nigeria (CBN) Governor, Alhaji Muhammad Sanusi II, has said the flexible exchange rate regime recently introduced by the central bank is not being fully implemented, just as he warned that targeting a pegged rate will not resolve the current forex problem.

He urged the central bank to allow the forces of demand and supply to determine the true value of the nation’s currency, in line with the flexible exchange rate policy.

He said this at the Risk Managers Association of Nigeria’s (RIMAN) annual conference in Lagos yesterday.

“There is a fantastic document by the central bank on the flexible exchange rate. We need to implement that document properly. So long as the implementation is not total and faithful to the document itself, you would have residual market risks.
“You have to let the market decide where the naira is going to be, to start with, before inflows come in and then when the inflows are in, you have an appreciation of the naira.

“So you have to live with a devaluation to N300/$1 plus and then it will firm up to N270/$ or N280/$1 or whatever. But so long as you target a rate of N280/$1, you are just moving the peg,” he argued.

He, however, pointed out that with the new forex policy, the central bank has been able to reduce the arbitrary opportunities in the market as well as improved its liquidity situation.

Speaking further on the current economic downturn and comparing it to the 2008-2009 situation, he said the volatility in the commodities’ market was worse then, compared to the current situation.

But the Emir of Kano said the country was able to mitigate the shocks due to the savings in the excess crude account (ECA) at the time.

“The situation going on today is very sad because we ought to have learned from our past experience. In the global crisis of 2008, which started from the financial markets and then hit the commodities market, the Nigeria financial system was badly affected, precisely for reasons similar to the reasons we have today.

“But 2008-2009 was much less severe than 2015-2016 and the reason was that prior to 2008, the government of former President Olusegun Obasanjo had built up buffers in the excess crude account and therefore the economic management authorities, both monetary and fiscal, did have some flexibility in their pursuit of countercyclical fiscal and monetary policies.

“It was possible to draw on a huge pool of reserves to mitigate the impact of a collapsing currency and to continue to fund imports and to also fund an expansion of government spending.

“In 2009, the CBN and the Minister of Finance took the decision that the oil price shock would be absorbed by nominal variables. We preferred that the exchange rate and nominal prices took the shock than the real economy.

“But what seems to have happened in 2015 is that the government took the decision to allow the real economy take the shock, while protecting nominal variables in terms of the exchange rate and that was the wrong choice to make.
“You do not absorb the real shock of the real economy, it is bad economics.

“As a country, in the years 2010 to 2014, we had a golden opportunity to have learned from the experience of 2008-2009, so that when oil prices went up to prepare us for when the prices went down, but we refused to learn and we refused to listen which is the situation that this administration has inherited – oil prices have gone down and there are no savings.

“The problem as I see it is that very difficult decisions have to be taken. Some of them have already been taken. But all the money we spent on subsidy was keeping the refineries open in Europe.

“If a small fraction had been spent on building domestic refineries, we would be totally independent of the external world for imports. We would be exporting refined crude. The economy would have been immune significantly from the shocks of falling crude oil prices,” he said.

The emir also urged the federal government to create an enabling environment to encourage foreign and local investors.

He said: “We are today in a situation where clearly the government does not have money. Oil prices have dropped, oil output is low because the Niger Delta Avengers is targeting the energy security of the country and the revenues of the government.

“At this point in time, the government needs to make it very clear that it recognises that economic development and investments in infrastructure can only come from the private sector.
“The risk we run is that we may send the wrong signals to the private sector because some statements that are made would suggest that the private sector is not welcomed.

“And if you don’t have the private sector committed to investing – local direct investment and foreign direct investment in the economy – the government simply cannot do it alone. It needs them to come in and build refineries, roads and invest in other critical infrastructure,” he said.
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