EXCHANGE RATE MANAGEMENT IN THE FACE OF GLOBAL CRISIS: A REVIEW OF RECENT EXPERIENCE IN NIGERIA BY FESTUS O. ODOKO DIRECTOR OF RESEARCH AND OPERATIONS WEST AFRICAN MONETARY AGENCY FREETOWN, SIERRA LEONE
OUTLINE 1. 2. 3. 4. 5. 6. Introduction Exchange rate management: conceptual issues The global economic crisis and implications for developing countries Nigeria’s recent experience with exchange rate management The way forward Concluding remarks
INTRODUCTION The global economic crisis constitute serious challenge to economic management One major impact has been on the development of exchange rates Outcomes not limited to industrial countries Several developing countries suffered repercussions
CONCEPTUAL ISSUES Exchange rate is the price of one currency in terms of another. Nominal versus real exchange rates Appreciation versus depreciation Two types of exchange rate regimes: Fixed exchange rate regime Flexible exchange rate regime
Conceptual Issues Contd Factors that affect exchange rates: economic fundamentals ▪ money supply, interest rates, inflation, degree of financial development & mobility ▪ trade balances ▪ the type of exchange rate regime ▪ complementary measures e. g. Counter ▪ cyclical fiscal policy, prudential regulation, and capital controls non-economic factors market expectations, rumours, panics etc.
THE GLOBAL ECON. CRISIS The recent economic crisis initially started as a financial crisis arising from low interest rates and high world economic growth. low interest rates prompted investors around the world to search for yield further down the credit quality curve, and high growth/low volatility led them to overoptimistic assessments about the risks ahead.
GLOBAL ECONOMIC CRISIS CONTD The financial system developed new structures and created new instruments that seemed to offer higher risk-adjusted yields, but were in fact more risky than they appeared. market discipline failed as optimism prevailed, due diligence was outsourced to credit rating agencies, and a financial sector compensation system based on short-term profits reinforced the momentum for risk taking.
GLOBAL ECONOMIC CRISIS CONTD The immediate cause was the housing bubble in the US and expectations of increasing values in the housing market and especially the difficulties experienced with repaying sub -prime mortgages in the United States of America.
Nigerian Recent Experience INDICATOR GDP DROWTH INFLATION (Y-Y) FOREIGN RESERVES (Billion) 2003 2004 2005 2006 2007 2008 9. 6 6. 4 6. 0 6. 2 6. 1 23. 8 10. 0 11. 6 8. 5 6. 6 15. 1 7. 5 17. 0 28. 3 42. 3 51. 3 53. 0 3. 5 3. 6 3. 7 50. 64 60. 12 82. 00 133. 50 132. 15 128. 65 125. 83 118. 53 5. 1 13. 3 9. 5 EXTERNAL DEBT (US$’ B) OIL PRICE (US$) (Annual Av. ) EXCHANGE RATE (US$) (Annual Av. ) STOCK MKT CAPITALIZATION (Trillion) 28. 1 129. 36 1. 4 36. 5 2. 1 2. 9
Nigeria’s experience Before the crisis: The growth of output represented by GDP averaged 7. 0 per cent over the period 2003 to 2007. Inflation during this period dropped sharply to 6. 6 per cent in 2007 from 30. 6 per cent in 2001. External debt came down to less than 2 per cent of GDP in 2007 from about 50 per cent in 2004 while debt service to export ratio fell to 0. 7 per cent. With onset of the crisis
NIGERIA’S EXPERIENCE MANAGEMENT OPTIONS: use reserves to defend the naira gradual depreciation shock therapy i. e. rapid depreciation SUPPLEMENTARY MEASURES Reversion to RDAS Suspension of inter-bank forex mkt Introduction of band of +/_ 3% Revision/ enlargement of eligible transactions under RDAS
THE WAY FORWARD Under a flexible exchange rate regime there are several options available: -Short run response - Medium to long-term response In the short term exchange rate could be affected by prudent fiscal management and market expectations In the medium term there is need to affect the factors that underlie demand for and the supply of forex •
THE WAY FORWARD Contd. Increase available forex by increasing production and export – agric products, manufactures and services including transportation, insurance and educational services • Reduce the demand forex by patronizing made in Nigeria products, by utilizing local health care institutions, revamping educational institutions and using local insurance companies •
CONCLUDING REMARKS Lessons that can be drawn from the crisis include: -anticipate economic developments and put in place contingency plans to mitigate adverse ones -collaboration needed at both regional and international levels to tackle crisis -need for responsible reporting -change of mindset on the part of all stakeholders • Final Word: we need Nigeria more than Nigeria needs us •
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