Consolidate the foreign exchange market (1)

An editorial by BusinessDay newspapers of Tuesday, February 3, 2015 supports and recommends that the foreign exchange market should be consolidated so that the same rate of exchange would rule across the markets; that is the official, the interbank, the Bureau De Change and the parallel markets. This recommendation is anchored on the fact of the rapidly dwindling reserves as a result of the falling price of oil and the uphill struggle to stem the slide in value of the naira exchange rate. In this editorial, the view expressed by Doyin Salami at the last Monetary Policy Committee (MPC) meeting in November 2014 was cited as further justification of this recommendation. Salami was quoted to have said, “Continuing to use the Wholesale and Retail Dutch Auction system in the allocation of foreign exchange is simply to afford subsidy unfairly to a section of the population. This segmentation must be removed urgently. It does not do us any credit and perpetuates financial market subsidy enjoyed by a few; very similar to the subsidy on fuel.” It is further argued that this recommended consolidation will facilitate the attainment of greater transparency and the development of both the market and the economy at large and end the current arbitrage opportunities in the market arising from the differential rates.

The circumstances that would eliminate the exchange rate differential amongst the markets is no brainer to fathom. If the Central Bank of Nigeria (CBN) can today meet all the demands for foreign exchange made on it, including the frivolous one to import non-essentials, the dichotomy between the markets will automatically disappear. But as all will agree, this is a clear impossibility as there is no way the CBN could embark on such an ill-advised course of action which is detrimental to the prospects of the national economy even if it has the capacity to do so. But as long as there are compatriots desiring to purchase foreign exchange who cannot meet their demand at the official window and this demand is met elsewhere, to that extent will the different markets exist. Otherwise with the best of intention there is no way the CBN could bring this uniformity in exchange rates to reality.

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It is also a fact that the Bureau De Change is a creation of the central bank which was established to help facilitate the availability of foreign exchange to those requiring small amounts of foreign exchange to meet legitimate demands, eliminating the protocols and thereby contributing to the stabilization of the exchange rate as well the deepening of the market. What the central bank has done and continues to grapple with is to attempt to reduce the spread amongst the markets. Unfortunately, to the extent that the CBN continues to regulate demands on the official market moving them to the other market segments, to that extent will the spreads continue to widen, providing a strong temptation to round-trip and embark on all manner of rent-seeking behaviours.

During the interactive session which the governor of the CBN held with the organized private sector in Lagos leveraging on the Nigerian Economic Summit Group (NESG) platform on Tuesday, 27 January, 2015 to explain recent developments at the foreign exchange market, a participant pointedly asked why the central bank is obsessed with the defence of the rate of exchange of the naira, recommending that like other developed countries in the world, we should allow the naira to float and find its value in the market. The participant pointedly cited the example of Japan. I also recall that at an end-of-year Christmas party at the house of a long-time friend who had served two terms as deputy governor of the central bank, more or less similar sentiments were expressed following the devaluation of the naira, to the effect that the extent of the devaluation was not deep enough to eliminate frivolous demands for foreign exchange.

But one thing which most of those pushing for the liberalization of the exchange rate fail to factor in is the nature of the export base of the country. The gentleman at the interactive session with the CBN governor in Lagos who recommended that the naira should be floated was reminded by no less a personality than Aliko Dangote that Nigeria does not have the sort of diversified manufacturing base to recommend the floating of the exchange rate.

Boniface Chizea