Nigeria’s exchange rate policy fuels inflation and affects food prices – economy Bitcoin News

Nigeria’s use of multiple exchange rate regimes could have contributed to a spike in the country’s inflation rate, according to the latest World Bank report. The report also said that continued restrictions on use and foreign exchange “continue to drive up prices for food and agricultural inputs such as fertilizers”.

Wrong exchange rates

In a report focusing on the country’s inflation developments, the global lender laments Nigeria’s reluctance to shift official exchange rates in parallel with the devaluation of the naira. The report explains:

Although the nominal currency window for investors and exporters [IEFX] The exchange rate has depreciated, which has helped ease inflationary pressures, but not quickly enough to rebalance the forex market.

As previously reported by Bitcoin.com News, Nigeria recently devalued the exchange rate of the naira for each US dollar to the current N411. However, this new rate is still below the parallel market rate of over N490 for every dollar.

It is this imbalance between official and parallel market rates that blames the World Bank for increasing inflationary pressures. The report continues:

“If there is a divergence between the official / IEFX rate and the parallel FX rate, the parallel rate is the one most associated with food price dynamics. Since companies cannot access FX in the IEFX window, they look for it via the parallel market and other alternative sources and take the parallel rate into account when making business decisions so that it ultimately comes to market prices for goods and services. “

Inconsistent CBN guidelines attacked

The same report also cites the monetary policy of the Central Bank of Nigeria (CBN), which it says is “inconsistent with prioritizing efforts to contain inflation”. The report claims that the tools the CBN uses to achieve its policy goals “sometimes contradict each other”. For example, a stable or fixed exchange rate promotes growth and helps contain inflation. The same policy, however, weakens the effectiveness of monetary transmission mechanisms in containing inflationary pressures.

Meanwhile, the World Bank wants (as part of its numerous recommendations) the West African country to make the Nigerian Autonomous Foreign Exchange (NAFEX) exchange rate – now the anchor rate for all formal foreign exchange transactions – more flexible in order to reduce real exchange rate misalignments. A more flexible interest rate could also increase Nigeria’s competitiveness and narrow the spread between the NAFEX rate and the parallel market rate, which would have a positive impact on inflation dynamics.

Do you think that it is still possible for Nigeria to tighten the official and parallel market exchange rates significantly? Let us know what you think in the comments section below.

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