The unpredictability of the exchange rate in the last few weeks has turned almost all Nigerians into economists, with almost everyone having an idea of what the government should do to bring normalcy to the forex market. Just like everyone else, I have made my contributions and shared my thoughts on what I believe will be a stopgap in the FX market. CBN earlier this week promised to take steps to restore normalcy. Hopefully, my suggestion of regulating Domiciliary Accounts will be given some thought.
My suggestion, which some of my friends now sarcastically call “Afonomics,” was a result of my conversation with a friend Ajibade on the state of our economy and the unpredictability of the price of USD to Naira. For the first time in a long time, Ajibade, the forex guru, said he has no clue about what the government needs to do to stabilize the market because the dollar is now technically Nigeria’s second legal tender. He said in a couple of days, 1 dollar will trade for 1000 naira. And that struck me as a fact, a disease that urgently needs a cure.
After reflecting, I thought of something I believe will work and will make a difference – a solution that will work if properly implemented. Rhetorically, I asked myself, what if the CBN comes up with a new policy that will strengthen the naira as the main legal tender it should be, discouraging forex deposits? A policy that mandates all banks to automatically transfer any balance in any domiciliary account to the I & E Window at COB every Friday, to boost liquidity the following week? This, I believe, will discourage speculation and unnecessary hoarding of forex by the elite. Many Nigerians have domiciliary accounts for dollars, pounds, and euros. The unification of the forex is not making any difference for now because of hoarding; the margin between the I & E Window is still as wide as it was before rate unification. Earlier in the week I shared this in some groups I belong to. The verbal attacks on me and my so-called policy were intense; I was bashed from all angles on why it will not work. As promised, my Viewpoint audience has a right to rebuttal; I want them to freely react to any write-ups.
Uche wrote: “My brother Afo, I don’t agree with this solution as it will take out all the remaining value we have. We need to produce more as a nation vs. consume. We need to produce what can sell competitively outside our borders, which will increase the demand for our currency. That is the primary way to increase our naira value against the dollar. Every other nation is using this method, and it is working. We are not that special or unique, besides corruption, and even with that, this new option you propose won’t solve it. I read in a post this morning that South Korea does not allow any government agency to purchase a car that is not Hyundai or Kia. Why can’t our government do the same with Innoson and Nord that are locally manufactured or assembled? Our issue is corruption; our solution is laws and practices to enable and strengthen local production for internal use and export.”
My response to Uche: “Brother Uche, I agree with you 100% that we should encourage local production, starting from the government. The above suggestion is to discourage speculation and the mopping spree that is currently going on. Even the likes of Innoson and Nord will benefit from the policy; after all, over 90% of their raw materials are imported. Banks are making a killing on dom accounts. I even heard that there is a major drive by banks for USD fixed deposits. Isn’t that crazy?”
Yomi said: “Supply is the fundamental issue, not hoarding. Nigeria is not earning enough to meet local demand. Unless that is fixed through foreign investments or export returns, the differential between the I & E rate and the alternative market will always exist. It would be rather draconian for the government to appropriate people’s domiciliary deposits as you have advocated. Argentina did it (it was called bank deposit pesification – all USD was automatically appropriated to pesos at the government rate), but it did not resolve the fundamental issue. The USDs will move from the banks to private vaults and mattresses.”
I responded to Yomi: “Thanks for your suggestion. The proposed policy can be implemented without making the same mistakes as Argentina. See my suggestion in comparison with Argentina’s:
Comparison and Suggestions for Nigeria using Argentina as an example:
Nature of Problem: Argentina faced a systemic banking crisis, while Nigeria faces a forex stabilization challenge. Different problems, different solutions.
Forcefulness of Measures: Argentina’s pesification was drastic, leading to legal battles and loss of confidence. Nigeria’s policy should be more measured.
Confidence in the System: Argentina lost trust. Nigeria should aim for transparency and careful communication to maintain trust.
Legal Considerations: Nigeria must consider legal implications, consulting stakeholders to avoid legal battles.