CBN’s study recommends floating exchange rate

Central Bank of Nigeria.

Central Bank of Nigeria.

15 May 2015, Lagos — A study published by Central Bank of Nigeria, CBN, in its Economic and Financial Review titled, “Exchange Rate Pass-Through to Domestic Prices in Nigeria: An Empirical Investigation” has recommended a floating exchange rate for the Naira.

This, according to the study on the impact of exchange rate on domestic prices, is because the impact of exchange rate on domestic prices is low, incomplete, and it takes about two years. “In other words, the fear of floating that the authorities exhibit in Nigeria may be unfounded.”

The study was conducted by three economic experts Abdulrasheed Zubair, George Okorie and Aliyu R. Sanusi.

The study stated that the major finding was in line with Aliyu et al., (2009), which submitted that exchange rate pass-through in Nigeria is incomplete and low. This, it said, was in contrast with the findings of Essien (2005) who said that the pass-through is complete in the long run. Secondly, the total impact is attained after eight quarters, suggesting that it is quiet slow.

“This is consistent with the literature on African countries, for example Ghana as found in Sanusi (2010). One interpretation of this low and slow exchange rate pass-through is that exporters to Nigeria practice a substantial degree of pricing-to-market strategy. Instead of allowing the naira price of their products to vary whenever there are changes in the exchange rate, these firms allow their mark-ups to vary as they change their local currency prices in the opposite direction of the change in exchange rate.

“We argue that this is plausible in Nigeria being a large market for fairly all its imported commodities. Firms would therefore strive to keep their competitive advantage in the domestic market as exchange rate changes. This explains the low pass-through observed.

“One implication of this finding is that the cost of true float may not be as large as it would under complete pass-through. There is therefore a good potential for de facto float, since only a small fraction of the excessive variations in the exchange rate that such a regime would entail will be passed onto inflation. In other words, the fear of floating that the authorities exhibit in Nigeria may be unfounded,” it stated.
*Bamidele Ogunwusi – Daily Independent

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