Following the implementation of the Central Bank of Nigeria’s (CBN) flexible foreign exchange (forex) policy on the 15th of June, 2016, retail consumers are yet to reap the benefits of the single market as commercial banks still quote black market rates for retail transactions. Based on the guidelines issued in furtherance of the new policy, retail consumers, include households, small and medium enterprises and importers of items on the restricted list. The spending by this group of consumers determines the price level and, therefore, the cost at which they source their forex will have a significant effect on prices.
It is generally agreed that the existence of a parallel or black market for foreign exchange suggests that the official exchange rate of the domestic currency has been overvalued. However, this premium can be eliminated either by devaluing the currency to bring it closer to the parallel market rate or by implementing a floating regime – the second option is the route that the CBN chose to follow. In its revised guidelines for the Nigerian inter-bank forex market, the CBN stated that its objective is to enhance efficiency and facilitate a liquid and transparent market. However, upon perusing the different guidelines and press release issued by the CBN for this purpose, it seems the CBN failed to address the practise of banks selling forex at rates that infer the existence of an unofficial market run by the banks.
This practise began in late 2014, following the drop in oil prices – the banks argued, at the time, that the disparity was a reflection of the actual cost of sourcing forex due to CBN’s inability to meet demand. The website, abokifx.com, quotes daily exchange rate for the Naira against several currencies obtainable at the Lagos Parallel Market, ATMs in different foreign locations, online transactions, Western Union, Money Gram and CBN official rate. A quick look at the Naira/US Dollar rate for June 8th shows that while the official rate reported on CBN’s website was 282, the Lagos parallel market sold at 352, FCMB at 346 and MoneyGram at 295.85.
In the absence of the necessary supportive framework and measures towards stabilising the market and moderating excesses, the introduction of the new policy is an exercise in futility. It is unclear how the benefits of the new regime will be passed on to retail consumers executing low value transactions for business, shopping or other leisure purposes. While it is expected that banks will charge a premium on forex transactions, there must be transparency in calculating charges. The sum must be reasonable and should not defeat the goal of the new policy. Regulating premium or fees charged on market transactions by operators is not a concept that is alien to Nigeria; the fees (including brokerage) charged on trades executed on the stock exchange is regulated. Perhaps the CBN should follow the example of capital market operators. One option is to set a ceiling for the premium that banks can charge on forex transactions in the retail market and provide guidelines on the factors that should be considered by banks in calculating the sum. An alternative is for a return to the previous practise of charging a fee. The banks quote mid or closing market rates and charge a flat fee per transaction; again, the CBN can provide for a maximum fee.
The true value of a currency is not what the central bank pegs it at but rather what the market will pay for it. Before the implementation of the flexible forex market, economists argued that the disparity between the official rate and the parallel market rate had the effect of, amongst others, deterring foreign investors from entering the Nigerian economy. While the effects of the current trend of high premium is arguable, what is certain is that retail prices will be on the increase should the CBN fail to intervene. The CBN, as apex regulator, must ensure that the banks do not unwittingly create another market rate for the Naira besides the official rate.
Elisabet Ekpenyong
