CBN’s exchange rate policy under scrutiny

The continued defence of the nation’s currency, the naira, for the maintenance of exchange rate stability at the expense of foreign reserves portends danger for the economy, analysts warn.

Considering the import-dependent nature of the economy, the analysts have called for caution by the Central Bank of Nigeria (CBN) as the continued defence of the naira would amount to subsidising importation of ostentatious goods that are only enjoyed by a few privileged citizens. They also argue that it breeds corruption and capital flight by multinationals repatriating their profits to their home countries.

Some analysts said at the weekend that the development would require the attention of Godwin Emefiele, CBN governor designate, as he prepares to assume office next month, despite his declaration at the Senate screening that he would continue to defend the naira.

BusinessDay gathered that the CBN spent over $9 billion to defend the naira, to keep it within the plus/minus three band of N150-160/$ in the last quarter of 2013, while the exchange rate at the bi-weekly Retail Dutch Auction (RDAS) hovered around N155/$ and parallel market N162/$, thereby creating opportunity for round-tripping.  

“It does not make sensible policy to use the reserve to defend the naira. We are using foreign reserves to create billionaires or millionaires illegally, at our own expense,” said Opeyemi Agbaje, CEO, RTC Advisory Services Limited.

“Anytime you do a rate that is different from the market, you are subsidising those who buy dollars because anybody who buys dollars from the RDAS is receiving a subsidy of N10 to N15 from the Nigerian government,” he said.

Agbaje, who spoke at the recent bi-monthly discourse of the Finance Correspondents Association of Nigeria (FICAN) in Lagos, said that this was because most Nigerians were aware that the naira was about N170 per dollar in the market, adding that the present action of the CBN amounted to subsidising the school fees of all the people that had their children in schools abroad, holiday makers and the importation of luxury items.

“Now there are some good elements of the subsidy – industries that import raw materials and create jobs or anybody that is importing currency for otherwise productive purpose. But what is the proportion of those productive purposes to the total consumption of dollars?” he queried.

“The CBN had to spend in excess of $9.24 billion to defend the currency in Q1, thus keeping it within the (±3 percent) band of 150-160 to the dollar,” said Bismarck Rewane, chief executive, Financial Derivatives Company, in this month’s Lagos Business School breakfast meeting publication. “There was a temporary accretion in external reserves to $38.1 billion in April, but now back to $37.96 billion. Mild external reserves depletion will start again to $37.5 billion.”

Ayodeji Ebo, head of research, Afrinvest, said the CBN had prioritised price and exchange rate stability as its major focus, amid other objectives, as a result of the momentous implications on the Nigeria economy.

“Regarding exchange rate stability, the CBN is confronted with two options – maintaining exchange rate stability by the utilisation of the external reserves, or allowing for a free fall of the naira (floating exchange rate system). The latter will have more significant implications on the macro economy in form of imported inflation due to the import-dependent structure of the economy. We believe the continued defence of the naira is indispensable, in view of the structure of the Nigerian economy (import-dependent) as well as the cross-sectional macroeconomic consequences of devaluation,” Ebo said.

“The CBN does a continuous balancing act when it comes to determining the foreign exchange rate at any point in time, said Kenneth Iwelumo, managing partner, CKX Partners limited. “No matter what rate it uses, someone in Nigeria will either lose or gain. The CBN has to consider many factors in determining (defending naira) the exchange rate, including how much FX it has to sell, the demand for FX, the state of the economy, potential demand by federal and state governments to execute ongoing projects, rates in the parallel and black markets, etc.”

Iwelumo, who recently retired from Merrylinch Bank of America as senior vice president, said that if the CBN was able to get the correct exchange rate between the naira and other foreign currencies, then the economy would do well. “If it gets it wrong, then the economy suffers,” he added.

John Omachonu