Business
Recession: Suspend exchange rate policy, float the Naira – Otti
BY KAZIE UKO
Former Group Managing Director and Chief Executive Officer of defunct Diamond Bank Plc, Dr Alex Otti, has advised the Central Bank of Nigeria (CBN) to suspend its current foreign exchange management policy and float the Naira, in order to pull the country back out of recession.
Otti, who led Diamond Bank to its glorious years and under whom the bank became the fifth most profitable and one of the eight systemically important banks in Nigeria, said CBN should become an active player in a free market where exchange rates will be determined by the forces of demand and supply.
“We believe government needs to do a few specific things to pull the economy back from the brink. It will not be a one-therapy-solution but a bouquet or cocktail of measures. In our opinion, the focus on the foreign exchange market and exchange rate management should stop henceforth. It is our considered view that the CBN should suspend its managed float exchange rate policy now and completely float the currency. CBN should therefore become an active player in a free market where exchange rates will be determined by the forces of demand and supply,” the finance expert and first-class economist wrote in his column, ‘Outside the Box’, in Monday edition of Thisday.
Otti, whose tenure was described by stakeholders and industry watchers as the brightest years of Diamond Bank’s 24 year-history, said in this period of recession the country should assume that she does not have oil or that her oil reserves have dried up or better still, recreate the lockdown scenario under Covid-19, where no one was willing to buy crude oil from her.
“Once we have reset our mind in this manner, then it would be easy to go in the direction we are proposing. Any time the CBN has foreign exchange to sell, its dealers would enter the market and sell at the market rate for that day. CBN will also buy directly from the market when it wants dollars. CBN, in the exercise of its regulatory role, may choose to buy or sell foreign exchange depending on the outcome it wants to achieve. If it wants to moderate rates downwards, it would sell and when it wants the opposite outcome, it will buy.
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“A few things would naturally happen if we did this. The first is that exchange rates would go up but would not stay there for long as the forces of demand and supply would regulate them towards some equilibrium. Second, CBN will no longer worry about managing exchange rates as market forces would take over. The third is that speculators would go out of business as there would no longer be uncertainty in the market. Fourth, the real price of the currency and imported goods and services would be clear as any hidden subsidy in foreign exchange would have been removed and the otherwise distortionary situation would be gone for good,” said the banker-turned politician who had accurately predicted Nigeria’s present relapse into recession in a previous write-up.
He continued: “The fifth is that CBN, and therefore government, would start receiving appropriate value for its foreign exchange earnings because it would be selling at the prevailing market rates which, to all intents and purposes, would be higher than the present official rate that is managed and therefore contrived. Sixth, the multiple exchange rate regime; another recipe for distortion; would have been permanently eliminated. Seven, consumption of foreign-made goods and services, would be reduced to necessaries to the elimination of luxuries, as it is today. The reason for this is because imports would thus become more expensive since their price would be denominated in the foreign currency. The converse would also happen for local consumption and production as foreign goods would no longer engage in an unfair competition because of the subsidy they hitherto enjoyed. This is the eighth thing that would happen.
“The ninth one is that, because the unfair competition would have been eliminated, local production would become more attractive and jobs would be created as a result. There is no doubt that it will help to suck up the large reserve army of the unemployed and restless youth. The tenth is that with more productivity and more local consumption, the economy will begin finally to grow again in real terms and GDP will begin to head north. It is only then that we can boldly bid recession goodbye.
“Finally, as the CBN begins selling its foreign exchange holdings at real market rates, it would raise more Naira for every such sale. This difference can be deployed in stimulating the economy without resorting to borrowing or printing money. This surplus can also be used in paying local contractors. Once they are thus paid, they would spend same in the economy, thereby increasing economic activities and whittling down recessionary pressure.”