The Chief Executive Officer for the Centre for the Promotion of Private Enterprise, Muda Yusuf, that the steps being taken to clear the backlogs of Foreign Exchange by the Central Bank of Nigeria (CBN) is a good idea, and that in a short to medium term, there will be an easing of the pressure faced, but it is not a “quick fix” to the fundamental structural deficiencies faced in Nigeria.
The economist, however, also said that the CBN’s approach to stemming the valuation of the naira should be interrogated, as the Nigerian economy cannot afford the dramatic changes in the foreign exchange, and that the government should address the social consequences of these reforms on Nigerians.
Yusuf, while addressing the clearing of another $500 million by the CBN in an interview with ARISE NEWS on Tuesday, said, “We have gotten to a point where borrowing to support this kind of system will also create its own challenges. So, I think the best way forward is what I believe the CBN is trying to do, because the magnitude of this challenge, it’s not something you can fix in six months, in seven months, because if your reserve has depleted so much, you have challenges with your oil production, oil output, you have an economy which, over the years, has been programmed to defend so much on foreign exchange from oil, you have an economy where the non-oil sector is contributing not more than, maybe 5-10% of your foreign exchange earnings, these are fundamental structural deficiencies, and these are not things that you can fix very quickly.
“But what I think is important in all of this is for the CBN to continue on this trajectory of trying to rebuild confidence, that is, by clearing this backlog so that whatever we have that is coming to the CBN will now be able to be injected directly into the market.”
The economist then revealed that ideally, the CBN should not be the major provider or supplier of forex, but that due to a confidence crisis, the responsibility and challenge of stabilising the market is now squarely resting on the apex bank.
He said, “Unfortunately, because of these backlogs, the CBN is not able to directly intervene in the market as effectively as it should because the CBN is prioritising the clearing of backlogs, which makes sense, because if you really want people to bring in force into your economy, those who had issues with this liquidity, those whose forex are already trapped, those whose transactions are disrupted by the liquidity crisis which is creating a lot of credibility for Nigeria in the international trade process, we need to sort out all those things.
“So, my view is because the CBN is trying to sort that out, the capacity to intervene to stabilise the market has been constrained significantly, more so that we have a situation where we have a reserve that is severely depleted, because you can only defend a currency to the extent of the reserves that you have.”
Yusuf then said that the CBN’s approach the stabilise the Naira needs to be questioned as he said, “We need to also interrogate the approach of the Central Bank in dealing with this situation because the economy cannot afford this kind of volatility that within a week or two weeks, you are seeing dramatic changes in the foreign exchange, I mean, almost three, four times. We need a framework that will help to stabilise it even within the context of these fundamental challenges.”
He then said that although the reforms are needed, the government should make the reform process less severe in terms of the pain that it is exerting on Nigerians, and that the government must address the social outcomes of the reforms being put in place.
In order to address social outcomes of these reforms, he said, “The government should go back to the drawing board and look at how to address the social consequences of these reforms. To reduce the pressure of prices, cost of living, cost of transportation, cost of energy. And in doing that, we may need to step out of the orthodox method of economic management, because this is something that is peculiar to our situation. We need to relate to our reality.
“You cannot drag this process completely though using the orthodoxy of economic policy. We need to recognize the implications of reforms for poverty, for job creation, for cost of living. So, the normal market principles cannot deliver that situation. So, it requires a lot of government intervention, but the intervention must be effective, it must be something that is not vulnerable to corruption, I think that is something that we need to do.”