Currency Devaluation Report suggests floating exchange rate for Naira

The report, titled “Exchange Rate Pass-Through to Domestic Prices in Nigeria: An Empirical Investigation”, was published by the Central Bank of Nigeria (CBN) in the Economic and Financial Review.

  • Published:
Stack of naira notes. play

Stack of naira notes.

(CBN)
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A report on the impact of exchange rates on domestic prices has suggested that a floating exchange rate be created for the naira.

The report, titled “Exchange Rate Pass-Through to Domestic Prices in Nigeria: An Empirical Investigation”, was published by the Central Bank of Nigeria (CBN) in the Economic and Financial Review.

It reads:

“The major finding is that, in line with Aliyu et al., (2009), exchange rate pass-through in Nigeria is incomplete and low. This is in contrast with the findings of Essien (2005) who found 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.”

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

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