The Resident Representative of the International Monetary Fund (IMF) in Nigeria, Mr. Ari Aisen, has said that Nigerians should determine the foreign exchange regime most appropriate for Nigeria.
He however stressed that the exchange rate policy adopted by any country should be determined by the priority and competitiveness of the country.
He spoke, in Abuja, yesterday, at an interactive panel on Monetary Policy Management in Challenging Times, at the Nigerian Economic Summit.
According to the Rep who called for a clear autonomy for the Central Bank of Nigeria (CBN) to be able to decide monetary policies in the country, issues around foreign exchange regimes are usually complex and decisions of the type to adopt by a country should depended on its priorities, competitiveness and the trade-offs each country was ready to accept.
His words, “The Central bank should be autonomous to take final decisions on monetary policies. On Ways and Means it is important to realise that if the government wants to provide services, health, education, pay salaries.
“To do that the government has to mobilise revenue. If you do not have revenue, then you will borrow to meet the obligations. If you don’t have the money available at the market, then you need to go to the central bank. If you go to the central bank, the debt is monetized, meaning printing money to finance your deficit. That in itself creates liquidity problems. If you can’t mop up the extra liquidity that the central bank has injected, then it leads to inflation and creates another problem.
“I hope with that sketch, I was able to demonstrate the relationship between fiscal and monetary policies and revenue mobilisation to achieve macroeconomic stability and for inflation to be low.
“It is a very difficult question and there are many trade-offs about the choice of the exchange regime, there are pros and cons about any exchange regime. Typically, a fixed exchange rate regime would stabilise prices in a way. That may be welcome in a way but you must have the foreign reserves sufficiently large enough for you to defend the exchange rate that you have fixed.
“On the other hand, you could have a floating exchange rate regime where the market decides the value of the currency. That does not put pressure on reserves because you do not need to intervene in determining the exchange rate but it is much more volatile because the exchange rate can fluctuate a lot.
“That has consequences for importers, exporters, and economic activities because of the volatility. In between these two difficult opposed policies, you could also have a hybrid in which you could intervene but you allow the exchange rate to fluctuate a little. So what is appropriate for Nigeria.
“First Nigerians will determine what is appropriate for Nigeria because every country has to take its decisions depending on its trade off and priorities and the competitiveness, as well as, the demand and supply of foreign exchange. It is a complex issue but for the ideal regime, we leave it to the country to decide based on its preferences.
Focus on attracting FDI
In his view Mr. Oluseye Olusoga, Founder of I-Invest, said that Nigeria should target more Foreign Direct Investments (FDIs) that are meant to be deployed in the productive sector, rather than portfolio investment.
He argued that portfolio investments hurt the nation’s economy as they only provide temporary relief, leaving the economy with more problems, as the capital and interest would always leave the nation, and usually unceremoniously.
His words, “We have to be careful with the kind of money that we want to attract to the economy. We were taught in school that when you issue bonds you are taking money from the system. But when portfolio investors come in and invest in (government) bonds, they actually make more money available to the government to spend, thereby increasing the volume of money.
“These investments will yield interests and when they want to repatriate their money, you will need more foreign exchange than what they brought to give them to repatriate both their capital investments and interests. They provide us short-term relief but leave us with bigger problems.”
Olusoga urged Nigerians in all sectors to place more priority on production, as according to him, with more productivity and especially for export, the nation would be able to earn more foreign exchange and bring relief to the nation’s currency at the foreign exchange market (Vanguard).
