How Nigeria Can Cope With The Exchange Rate Crisis — Bode Agusto

A former director general of the Federation's Budget Office, Bode Agusto, has said that pegs of the naira to the US dollar cannot permanently solve the exchange rate crisis.

Mr. Agusto also said that floating the naira, which means allowing the forces of demand and supply to determine the rate at which the local currency trades against the USD, is not advisable for the market. country.

In an article published on his website, he suggested that the country could adopt a creeping peg to effectively manage exchange rates.

Adopting a creeping peg simply means that Nigeria starts at a near-market NGN/USD exchange rate and then lets its currency depreciate (or appreciate) against the USD by a value close to the annual inflation difference.

“This is the option we recommend for Nigeria. Today, this means starting at an NGN/USD exchange rate of around 600/1, then allowing the currency to depreciate by around 10% per year.

“It also means allowing knowledgeable and willing buyers to do business with knowledgeable and willing sellers at contract rates.”

He suggests that the CBN may intervene in the market when rates are significantly above or below its target.

He explained that Kenya and Botswana have successfully managed their exchange rates for a number of years using this option.

“Will Nigerian politicians and policy makers accept a 10% annual depreciation against the dollar? This is the reality they must face.

"They must eat humbly and accept that a USD peg, while desirable, is unattainable".

According to him, a 10% annual depreciation against the US dollar is foreseeable, businesses and households that depend on imports can prepare for it.

Mr. Agusto also offered suggestions on how the federal government can manage long-term inflation on the downside to significantly reduce the annual rate of currency depreciation.

Three main factors contribute to inflation: too much money in circulation, rising input costs, and too much demand relative to supply.

He believes that the driver of inflation in Nigeria is significantly around supply and demand dynamics due to increasing population with little supply.

“Nigeria adds five million people to its population every year. This leads to a significant increase in the demand for food, housing, clothing, health care and other things,” he said. written.

“On top of that, more than 22 million Nigerians, willing and able to work, are unemployed. We believe that if Nigeria is better able to manage its population growth (demand) and can get a larger proportion of its population to work and produce (supply), it can significantly reduce inflation over the long term.

“These are, in our view, the nuts that Nigeria needs to crack to reduce inflation in the long run.”

He noted that Nigeria's unemployed population is roughly the size of Burkina Faso and this poses a huge security problem that needs to be addressed.

Since the Central Bank of Nigeria halted foreign exchange sales to money changers in July 2021 on the grounds that the parallel market had become a conduit for illicit currency flows and corruption, the naira has fallen at record levels.

On Friday, the naira depreciated against the US dollar in the official market, falling 0.66% to 429.00 naira to the dollar, from 426.20 naira traded at the Nafex counter in the previous session Thursday.

On the parallel market, the currency is currently trading between 700 and 710 naira per dollar, amid a shortage of foreign currency as demand increases.

This continued decline in the value of the naira has raised serious concerns among stakeholders and citizens.

Some analysts have blamed this on rising import bills, dollar savings and hoarding of cryptocurrencies by Nigerians who have lost faith in the local unit due to its massive devaluation by against the greenback, while some have blamed the recent crisis on the Central Bank. Nigeria's strict foreign exchange policies.

Mr. Agusto is a respected figure in Nigerian business and economy. In 2003, President Olusegun Obasanjo awarded him the national honor of Member of the Order of the Federal Republic for his contribution to the Nigerian economy.

Subsequently, the then President appointed him Director General and Special Advisor to the President on Budgetary Matters.

Currently, Mr Ag...