The strength of a nation’s currency is an expression of the vibrancy, and robustness of that country’s economy. Conversely, a very weak currency therefore is a mark of a country with a perverse economic mix.
Our currency has plummeted in 30 years from 60 kobo=$1 (when we could not be described amongst the world’s poorest) to the present N132.80=$1 to now become classified amongst the world’s poorest, even when our $17 billion reserve is the highest in 30 years! What a veritable paradox! Alarmingly, nonetheless, there is still no tangible impact on social welfare.
A country’s economy is considered to be relatively stable if its foreign reserves readily cover up to six months of imports. Thus, a nation’s export competitiveness and consequent trade balances will induce currency appreciation. Regrettably, despite, positive trade balances for several years, with reserves that cover over 18 months of imports, according to the Central Bank of Nigeria sources, the naira has inexplicably failed to meaningfully appreciate against the dollar.
The cause of this contradiction can be found in the manner our foreign exchange earnings are currently infused into the economy. The current practice is for the CBN to substitute the naira for distributable dollar revenue each month, with an exchange rate which is unilaterally determined by the CBN. This practice requires the provision of a relatively huge naira cover, which keeps the mints busy while the inflationary product of this arrangement, will be ironically restrained by the compulsion for the CBN to borrow back the resultant naira surplus through the sale of Treasury bills with aggressive and distortional interest rates of up to 17 per cent. Surprisingly thereafter, rations of the dollars retained by the CBN after naira substitution will be auctioned in a money market which is undeniably, embarrassingly overwhelmed with surplus naira, which will fuel inflation.
The inability of industries to thrive with CBN’s deliberate inducement of interest rates as high as 25 per cent, the related high rate of unemployment, and inordinately high commercial bank profits, even when the real sector is embattled, are all traceable to this odious payments model.
The scourge of multiple exchange rates is also fallout of the inability of the current system to produce a workable single naira exchange rate. Alarmingly, the Nigerian economy presently features at least five different exchange rates. Let us take a look at some of these.
The five rates of the naira
The rate at which the CBN converts the monthly distributable dollar revenue into naira before sharing to constitutional beneficiaries may be described as the Revenue Rate. This rate has hovered between N100 and 110=$ since 2001.
The special rates for oil marketers’ fuel imports: This rate became unavoidable after the upward surge in demand of fuel importers for foreign exchange after deregulation to keep prices stable. There is no official confirmation of this rate but it may not have remained at N123=$ as before.
The N132.80=$ DAS rate is generally regarded as the official rate, and is determined at weekly auctions in which the CBN, will, as in a monopoly, provide all the dollar supply. However, by depositing the huge cash surpluses of government agencies in commercial banks, the CBN inadvertently, also partly funds commercial banks’ purchase of dollars auctioned. Evidently, there is no semblance of a free market with multiple sellers of dollars in DAS’ auctions. What we have is a monopoly at both ends of the market. (i.e. the CBN’s monopoly of dollar as well as naira supply).
Regrettably therefore, the naira rate has unexpectedly primarily remained impervious to increasing dollar supply. For example, the dollar lost 25 per cent against most international currencies last year, yet, despite Nigeria’s consistent trade surpluses with increasing reserves, the naira inexplicably remained resistant to the dollar at N132.8=$ for about eight months. This rate becomes a depreciation of over 20 per cent when compounded with dollar depreciation against the Euro and Sterling.
The export proceeds rate is the rate at which banks sell foreign exchange inflow from private sector exporters and foreign direct investors outside the CBN sources. The applicable rate is usually some percentage points higher than the official DAS’ rate. There are suggestions, however, that most of the funds traded as export proceeds are actually round-tripped foreign exchange from the official DAS. Incidentally, the CBN has also publicly decried the indulgence of several banks in large scale round-tripping. Surprisingly however, so far, only one or two banks have been given a slap on the wrist sanctions for this fraud! Critics have also suggested that the huge gains from round-tripping may be partly responsible for the rapid expansion and apparent profitability in the banking sector, despite the continuous contraction of the real sector, whose fortunes under normal circumstances, should move in unison with that of banks!
The interbank rate is adopted for foreign exchange transactions between fellow banks. The foreign exchange supply to this market is derived from the so-called export proceeds market referred to above.
In the preceding narrative, we have identified five different exchange rates already, but we cannot complete this piece without mention of the ubiquitous black market rate, which has been described as the tail that wags the dog! The black market, by its nature, is normally relatively shallow as can be observed in the frenzy of operators to consolidate exchanges above $1000 at any of the “joints” in Martins Street or Allen Avenue in Lagos. So, why should such a presumed small market that primarily serves the forex needs of travellers surprisingly control the official DAS rate? Generally, the gap between the black market rate and the DAS hovered between four and 15 per cent since 2001, and the current rate is N140=$. The CBN’s traditional equalisation strategy is to attempt to close the gap between the black market by raising the official rate, but soon after such adjustment, the black market rate will once more outstrip the DAS rate and this will once again be followed by further adjustment in an endless cycle of naira devaluation.
The net consequence of having a multiplicity of exchange rates against the naira is an incoherent and obtuse foreign exchange market. The leakages which are made possible by the system translate into a virus in the economic system where the absence of a level playing ground creates distortions to a free market system with adverse consequences for efficient resource allocation. The system encourages indolent rent seekers and also disturbs the “work and reward ethic” as huge sums can be made without any real direct contribution.
A country with a multiplicity of exchange rates will have a rudderless monetary framework; besides its currency will remain weak, even if external reserves continuously increase! It is clearly recipe for economic backwardness!”
The above article was first published in Vanguard Newspaper in January 2005. Regrettably, the predicament of widely divergent multiple exchange rates still prevails in 2017, and there are allegedly almost a dozen operating rates presently: the budget rate (N305/U$); interbank (N315/U$); airline rate (N355/U$); money transfer organisations; Western Union (N375/U$); Travellex (N345/U$); BDC (N400/U$1); while parallel market (N495/U$1) is over 60 per cent of budget rate.
Furthermore, in an official press release in February 2017, the CBN also approved a deviation, not exceeding 20 per cent for forex requirements for personal and business travel, as well as for education and medical needs.
Clearly, with such wide margins of deviation, and the ingenious capacity of Nigerians to exploit gaps, invariably the serious distortions induced by the prevalence of multiple exchange rates with such wide disparity will clearly continue to constrain transparency and the critical indices that should promote economic growth and improve social welfare will also be adversely distorted.