As dollar to naira continues to be a topic of discussion on a daily basis, the World Bank has faulted Nigeria’s forex policies with a claim that they are discouraging investments, and fueling inflation.
While highlighting the role of the Central Bank of Nigeria (CBN) as it relates to forex stability, World Bank, in its November edition of its Nigeria Development Update, stated that the local currency is under pressure because of the apex bank’s constant increment of the exchange rate’s value.
World Bank argued that CBN is too rigid in its forex policies, and according to the international body, the rigidity is accelerating inflation in the country.
The report read: “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 percent in March 2020, five percent in August 2020, and seven percent 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.”
Maintaining that the central bank is yet to introduce flexibility as it relates to responding to external shocks, World Bank stated that the NAFEX rate, which is the only officially acceptable one in the country, doesn’t represent the reality of the forex market.
“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 percent 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,” the report added.