A report by one of Nigeria’s foremost credit rating agencies, Agusto and Co, has faulted the floating exchange rate system by the Central Bank of Nigeria, noting that only countries that earn a lot of US dollars can effectively adopt a pegged exchange rate system.
This was contained in a report prepared by the founder, Bode Agusto, titled: “Nigeria – Exchange Rate Management.”
The report pointed out that countries that earn a lot of USD may peg their currencies to the USD, the most prominent examples are the oil-rich countries of Saudi Arabia (since 2003) and Qatar (since 2001) but there are others like Panama (since 1904) and Belize (since 1978), and all these countries would sell USD to willing buyers at the exchange rates they have set.
“Can Nigeria sell USD at N420/$1 to all those who want to buy? The fact that Nigeria cannot has led to the development of a parallel market that commands a large premium. At N420/$1, everyone wants to buy USD from the Central Bank of Nigeria (CBN) but no one wants to sell it. This means that a rate of N420/$1 is below equilibrium and is unsustainable. Nigeria has tried several times in the past to peg the NGN to the USD and has failed every time,” it read.
The study, however, recommended a crawling peg exchange rate system.
“This means that a country starts at a near market LCY/USD exchange rate and then allows its currency to depreciate (or appreciate) against the USD by close to the difference in annual inflation. This is the option we recommend for Nigeria.
“Today, this means starting at a NGN/USD exchange rate of around N600/$1 and then allowing the currency to depreciate by around 10% per year. It also means allowing knowledgeable willing buyers to do business with knowledgeable willing sellers at contracted rates. The CBN may intervene in the market when rates are significantly higher or lower than its target. Kenya and Botswana have successfully managed their exchange rates for a number of years using this option.”
The report which which analysed the movement of Nigeria’s exchange rate against the US Dollar amidst rising inflation rate, said controlling the country’s rising rate of population growth is a possible panacea to the country’s high inflationary pressure.
It added that better management of the population and improved productivity will help reduce the long-term inflation in Nigeria.
