The World Bank has averred that the current multiple exchange rate system operated by the CBN leads to lower economic growth, is related to high inflation, and discourages foreign direct investment.
The Bank made this known in a blog by its President David Malpass titled; Parallel Exchange Rate: The World Bank’s Approach to Helping People in Developing Economies.
According to Mr Malpass;
- “The economics of parallel exchange rates is clear: they are expensive, highly distortionary for all market participants, are associated with higher inflation, impede private sector development and foreign investment, and lead to lower growth”
In the blog post, 24 Emerging and Developing Economies (EMDEs) were highlighted as currently operating the multiple exchange rate system. He argued that efforts by developing countries such as Nigeria to do away with the multiple exchange rate system have met a brick wall as these countries have shown a reluctance to change.
He stated;
- “In some countries, authorities have embarked on a unification process but are reluctant to move quickly enough because vested interests will be giving up a subsidy. The gradual approach to FX unification often results in no unification despite repeated Fund arrangements.”
Mr Malpass argued the effects of multiple exchange rate systems includes; reducing the impact of the World Bank development project, leading to corrupt practices, could make debt servicing obligation more burdensome and increasing the likelihood of debt distress.
In his words,
- “Parallel exchange rate markets can also significantly diminish the impact of World Bank projects. A primary problem is the lack of value for money when financing projects that have local currency expenses.
What you should know
When World Bank dollar-denominated loans are converted into local currency at the overvalued official rate, fewer local-currency resources are available than if the exchange had happened at the parallel market rate.
This reduces the development impact of World Bank operations. For example, if the World Bank operation is financing cash transfers for the poor paid in local currency, this means fewer people will enjoy the benefit.”
The World Bank chief highlighted the institution’s approach to curbing the problem, some of which are not providing budget support assistance to countries with significant foreign exchange rate premiums. According to the World Bank, Nigeria has a premium distortion difference of 61 per cent as of March 2023.
Other strategies being deployed by the bank involve ensuring loans are solely used to finance foreign expenditure and the cost of local expenditure is financed by the countries themselves. Also, the bank has made sure governments provide funding for the difference between the official exchange rate and the parallel market in countries where the difference is significant.
In his words;
- “… Another way is to ask the government to provide counterpart financing to partly compensate for the exchange premium between the official and the parallel foreign exchange rate in countries where the cost of the policy is most apparent and distortive…”
Earlier in the week President Tinubu in his inaugural address hinted at ending the multiple exchange rate system in Nigeria.
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Source: Nairematrics
