Forex crisis world bank blames cbns fixed exchange regime
The World Bank has indeed attributed the 2015-2016 foreign exchange crisis in Nigeria to the Central Bank of Nigeria's (CBN) fixed exchange rate regime.
In a report titled "Nigeria's Foreign Exchange Crisis: Causes, Consequences, and Policy Options," the World Bank identified the CBN's fixed exchange rate regime as a major contributor to the crisis. The report was published in 2017.
The CBN had maintained a fixed exchange rate of N197 to the US dollar since 2009, which was seen as a way to stabilize the economy and attract foreign investment. However, this policy led to a number of unintended consequences, including:
- Artificially high exchange rate: The fixed exchange rate made the naira overvalued, making it difficult for Nigerian businesses to compete with foreign companies.
- Incentivizing imports: The overvalued naira made imports cheaper, leading to an increase in imports and a decline in domestic production.
- Encouraging smuggling: The high exchange rate made it profitable for smugglers to import goods into Nigeria, further eroding domestic production.
- Reducing foreign investment: The fixed exchange rate made Nigeria less attractive to foreign investors, who were deterred by the perceived lack of flexibility in the exchange rate.
The World Bank report argued that the CBN's fixed exchange rate regime was unsustainable and contributed to the foreign exchange crisis, which was characterized by:
- Depletion of foreign reserves: Nigeria's foreign reserves declined from $64 billion in 2013 to $23 billion in 2016.
- Shortages of foreign exchange: The country faced severe shortages of foreign exchange, making it difficult for businesses to access the currency they needed to import goods and services.
- Inflation: The crisis led to high inflation rates, which eroded the purchasing power of Nigerians.
The World Bank recommended that the CBN adopt a more flexible exchange rate regime, which would allow the naira to float freely in the foreign exchange market. This would help to:
- Reflect the true value of the naira: A floating exchange rate would allow the naira to reflect its true value in the market, rather than being artificially fixed.
- Encourage foreign investment: A more flexible exchange rate would make Nigeria more attractive to foreign investors, who would be willing to take on the risks associated with investing in a country with a more stable and flexible exchange rate.
- Promote domestic production: A floating exchange rate would make imports more expensive, encouraging domestic production and reducing the country's reliance on imports.
The CBN eventually adopted a more flexible exchange rate regime in 2016, allowing the naira to float freely in the foreign exchange market. This move helped to stabilize the economy and attract foreign investment.