Peter Obi’s exchange rate and inflation rate promise did not say the how

Peter Obi, the presidential candidate for Nigeria’s Labour Party suggested that if elected, his administration will eliminate import and forex restrictions,  as well as,  aim to ensure a single forex market, citing that multiple exchange rate regime encourages capital flight and deters investment.  

He also outlined his top priorities, including production-centered growth for food security and export, securing and uniting Nigeria.  

Peter Obi disclosed this in his speech at Harvard University, where he was invited to address scholars and critical thinkers. The event is part of his widespread consultations with diaspora Nigerians.  

Peter Obi’s comment 

Mr. Obi disclosed that his campaign will remove import and forex restrictions and insist on a single forex market.  

However, what Peter Obi did not elaborate on, is the how?  

From an economics perspective, Mr. Obi has been speaking about topics that resonate with large swathes of the Nigerian youth. This appears to be fueling his popularity among Nigerians in general. 

Consequently having been previously referred to by an opponent as a “social media” candidate, recent rallies across the country may suggest otherwise. 

Additionally, several opinion polls also allude to his growing popularity, with some placing him at the forefront of who could win the 2023 general elections.  

His increasing popularity somewhat justifies his approach, whereby he continues to speak against some of the unpopular policies of the current administration (inclusive of critiquing the central bank’s existing forex policies such as the support of multiple exchange rates and banning of 41 items which have been in place since 2015). 

Nigeria’s multiple exchange rates  

The exchange rate between the naira and the dollar has fallen by over 26% this year as several CBN policies fail to address the gap between demand and supply. One of the most critiqued policies of the central bank is the maintenance of separate exchange rate windows.  

In other words, by creating a special window for specific users and also limiting what are eligible transactions, Nigeria’s central bank is simply acknowledging that it cannot meet all demands for forex but just a portion. Furthermore, even those with eligible transactions continually experience delays in completing their transactions and thus have to resort to alternative sources for forex. 

This begs the question of why does the CBN need to create a special window in the first place and put restrictions on allowing a market-determined FX rate if the end state is artificial scarcity at the special window with resulting pressure on alternative sources? 

Anecdotal evidence suggests that the need to appease the federal government’s wish of maintaining a fixed forex policy has often been cited as the reason why the central bank has pursued this policy.  

Another reason that Mr. Godwin Emefiele, the CBN governor has proffered for maintaining the unpopular NAFEX exchange rate is that the black market represents a small percentage of the market and as such cannot be the right exchange rate. Therefore his preference is to exert top-down control of prices rather than a market-determined price outside the CBNs control. 

Thus Nigerians should continue to expect multiple exchange rates under the current administration. 

So what could be alternative solutions? 

This perhaps explains why Peter Obi stated that he plans to make the central bank independent, believing that this independence will force the apex bank to adopt a free market-determined exchange rate. While this is an approach that will likely restore confidence among foreign investors and exporters, he did not provide details explaining how this will work. 

• Is he in favour of a complete free float of the exchange rate or does he prefer a managed float of the exchange rate? 
•  A free float essentially keeps the central bank out of the forex market, allowing the market to determine prices 100%.  
• The advantage is that demand will be met by supply at a mutually agreed price so likely less scarcity. The immediate disadvantage is that where forex demand continues to be higher than supply as we have seen in months, the exchange rate will continue to depreciate. 

Adopting a free-market exchange rate is therefore not a silver bullet and will not immediately stop the exchange rate from falling further. 

For context, Ghana, free float exchange rate policy hasn’t stopped the Cedi depreciation by over 40% this year. Most currencies around the world are also experiencing a free fall against the dollar.  

Adopting a managed float, on the other hand, allows the exchange rate to trade within a band that is adjusted regularly as demand and supply dynamics change. When demand is higher than supply, the central bank allows the exchange rate to fall accordingly.

The central bank also intervenes in this market only as a major supplier, especially at times when it wants to slow down depreciation. The major difference between a fixed float and a managed float is that the rates are adjusted frequently, giving the market confidence.  

But what is clear here is that a managed or a free float is not a guarantee of a stable exchange rate or an appreciation of the exchange rate.  

To achieve exchange rate appreciation, Nigeria will have to be able to attract hundreds of billions of dollars in investments. The last time the exchange rate traded at N360/1, between 2017 and 2019, the central bank sold trillions of naira in OMO bills to foreign investors in exchange for interest rates as high as 19% 

Is Peter Obi willing to go this route of fixing Nigeria’s fiscal policies to attract Foreign Direct investors or seek Foreign Portfolio investment through higher interest rates via the CBN if he wins? 

Nigeria also faces major challenges on the fiscal front as oil exports continue to underperform. Nigeria used to earn as much as $80 billion from crude oil exports before 2014, however, a combination of lower oil prices, and oil theft has decimated crude oil exports to an average of $42 billion annually since 2015. Except these challenges disappear immediately after he resumes, we will continue to face fiscal challenges. Nigeria’s high debt situation is also a major issue with government debt servicing far outpacing revenues. 

Peter Obi also speaks to Nigeria’s galloping inflation rate, which he promises to bring down to single digits. How exactly? Nigeria’s inflation is now driven by supply-side challenges such as insecurity, infrastructure challenges, logistics, and even imported inflation. More recently, we have seen an increase in money supply as a major contributor to high inflation. 

Is the plan to force inflation down by fiat? 

It is acknowledged that these challenges will not be fixed overnight but some insight into policy direction will be welcomed. 

• All presidential candidates need to give a lot of thought to the foreign exchange quagmire, as well as, weak productivity growth.
• Peter Obi has started well by telling us what he intends to do thus we also encourage other presidential aspirants to also state what forex market they prefer as well as the how.
• As the election is now fully geared for campaign mode, Nigerians will need answers sooner rather than later.