Yoyo naira exchange rates and common sense By Henry Boyo

CBN & Exchange rate: Naira & Dollar

Nigerians were clearly bewildered by the recent wild swings in the Naira Exchange rate. Regrettably, however, despite Godwin Emefiele’s earlier assurances to the contrary, Naira was officially devalued from N155=$1 to N165 and later to N197=$1 within his first year as Central Bank Governor.

Notwithstanding, the CBN has again assured Nigerians, that the current Naira rate would be stable, as it is inappropriate for the tail (i.e. the small parallel market) to wag the dog.Expectedly, the dollar rate quickly skipped beyond N220=$1 in the parallel market, while speculative dollar accumulation by hoarders and the subsequent denial of access to official forex to importers of 41 sundry items, later catapulted the parallel market Naira exchange rate beyond N240=$1.

Nevertheless, the CBN may have been in denial of the inflationary potential on the economy of the ultimately higher market prices for rice and 40 other items recently banned from official dollar purchase.

Consequently, the inevitable reality of such inflationary push, will compromise the achievement of CBN’s core mandate for price stability for some time to come. Furthermore, although parallel market Naira exchange rates improved immediately after the rejection of forex deposits from bank customers, such improvement will probably also be short-lived as this process will only constrict the primary source of dollar supply from CBN’s real time forex allocation to over 1,000 licensed Bureau de change (BDC) nationwide.

It is certainly not best practice for Central Banks to formally fund BDCs, but CBN’s apparent favorable disposition is clearly the result of the IMF’s misguided prescription which made such liberal dispersal of official dollars to BDCs as one of the conditionalities for debt exit in 2005-6.

Remarkably, monthly dollar supplies to BDCs often exceeded $1b when Nigeria’s dollar reserves approached the premium level of about $60bn; nevertheless, each BDC is currently entitled to $30,000 allocation weekly, while Nigerians with Naira denominated debit cards can still also obtain $300 per day directly from ATM terminals abroad at the official rate of N197=$1, up to a limit of $50,000 annually, i.e. down from the earlier stupendous $150,000 per person.

CBN’s sustenance of such liberal forex allocations is clearly inexplicable, especially, when infact, probably less than 1% of Nigerians earn $50,000/annum, while dollar allocations to BDCs ultimately also fund imports of contraband and forex round tripping with the collateral threat to the survival of local industries and the disenabling economic dislocations.

Nonetheless, we have returned once more to the forgone era of multiple exchange rates, despite the attendant economic distortions of this practice; for example, while faith pilgrims enjoy forex rates at N160=$1, importers of 41 delisted items would endure N225-250/$, while fuel and all other imports are favored with the currently subsidized price of N197/$.

Clearly, the wide disparities between the different Naira exchange rates and the huge opportunity for gain will undoubtedly instigate sharp practices in the forex market. Fortunately, the Senate has invited the CBN Governor to explain the reasons behind Naira devaluation and the wild swings in the parallel market. Expectedly, Emefiele will identify increasing speculation and the drop in crude oil prices/revenue as the primary causes of the Naira’s predicament.

It would be unfortunate if the Senate is sufficiently gullible to accept drop in crude prices/revenue as a plausible cause of Naira depreciation, without asking the CBN Governor to explain why the Naira exchange rate remained static and unexpectedly even depreciated marginally when crude prices conversely exceeded $140/barrel, and forex reserves exceeded $60bn after debt exit in 2006!

Plausible reasons for the price contradictions in the forex market have, lately, also agitated the minds of individuals as well as critical interest groups. For example, one, Matthew Somoye suggested in the Guardian advertorial of 5/8/2015, that the solution to a stable stronger Naira and the elimination of multiple exchange rates would be found in the supply side of the foreign exchange equation; Somoye therefore recommended as follows:

“Every month, both the federal and state governments receive monthly allocations from crude oil dollar denominated revenue and CBN converts the Naira and gives out to States. This huge Naira volume chases few dollars which further fuels an already bad situation.

CBN should change the order by paying the states and federal agencies in dollars” ……. “and for the commercial banks to buy the dollars from the state governments and sell to importers. The implication of this is that the so called FX that is scarce will not be that scarce, as genuine importers under eligible transactions can relatively find dollars from the interbank and the interbank will become rich again”.

Similarly, the Ikeja Branch of the Manufacturers’ Association of Nigeria concluded as follows in a Guardian advertorial titled “Manufacturers Association of Nigeria’s position paper on the management of foreign exchange in Nigeria to enhance the performance of the manufacturing sector”:( Guardian 5/7/2015 edition, pg 50)

“We, as manufacturers will be very satisfied if inflation falls to less than 2% while monetary policy rate is anchored on a rate between 1-3% so that cost of funds to the real sector will fall below 8% across the board! We are confident that the adoption of dollar certificates for the allocation of distributable dollar revenue will quickly bring about the desired industrially supportive environment and also reduce the pool of excess Naira liquidity that drives corruption in the public service.”

Finally, in its editorial of 6/8/2015, titled “CBN and the economy”, the   Guardian   Newspaper examined the origin and trajectory of exchange rate management and concluded as follows:

“For Nigeria to begin to close the gap by facilitating extensive investments that create jobs, Buhari should urgently stop both the politically dictated wrongful withholding by CBN of Federation Account dollar allocations and their simultaneous substitution with freshly printed naira amounts by not only directing the country’s public sector and autonomous forex to be transacted appropriately but also allowing the apex bank the leeway to professionally carry out its statutory mandate”.

Instructively, the CBN is clearly familiar with the recommendation of dollar allocations for dollar denominated revenue and indeed the Vision 2020 blueprint’s ‘monetary policy thrust’ also recognized that its adoption would strengthen the Naira exchange rate ad significantly reduce the rates of inflation and cost of funds.

In retrospect, after over 5years of denial, the CBN adopted this enabling payments system in its “Strategic Agenda for the Naira” in August 2007. Regrettably, the initiative was Dead on arrival as the incumbent Attorney General, one Andoaka, summarily truncated the reform as unconstitutional. Sadly, the CBN authorities have become too timid since then to even contemplate this clearly enabling reform strategy that would induce price stability.