The World Bank has advised the Nigerian government that its monetary policy as it relates to exchange rate stability has demoralized investors and exacerbated inflation in the Nigerian economy.
The World Bank Group, which consist of 180 member countries, disclosed this during the Nigeria Development Update, November Edition.
Laying emphasis on the importance of the Central bank on the strength of Naira, the World Bank explained that there is an intense pressure on the Naira, as the Central Bank continuously increases the official nominal exchange rate. The Bank further stated that the CBN’s forex exchange management system was too ridged, Thus inflationary tendencies are inevitable.
The report stated, “The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.
“Pressure on the Naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 per cent in March 2020, five per cent in August 2020, and seven per cent in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation.”
The report stated that sufficient flexibility in the foreign exchange market is yet to be established by the Central Bank of Nigeria, Thus external shock cannot be sustained. The report added that the NAFEX rate was not a true reflection of the market rate.
Notes from the report, “While the CBN supplied an average of $2.5bn to the Investors and Exporters forex window in the months just prior to the COVID-19 crisis, it only supplied an average of $0.5bn in the months thereafter.
“The NAFEX rate, which is now the guiding exchange rate for the economy, continues to be managed and is not fully reflective of market conditions. The parallel market premium over the NAFEX rate reached 29 per cent in August 2021 after the CBN cut off its weekly supply of $20,000 per bureau de change. The CBN has intermittently supplied forex to BDCs since 2005, providing ample opportunities for currency round-tripping.”