Last week, I talked about the state of the forex market in the country and how its unpredictability has continued to destabilise every aspect of our lives. The CBN had given a ray of hope when it committed to restoring normalcy.
Well, there’s no let-off yet as the FX market remains volatile. My suggestion to tame the forex market, which some of my friends now sarcastically call “Afonomics,” was centred around discouraging forex deposits. I proposed 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. I strongly believe that will discourage speculation and unnecessary hoarding of forex.
There were a few reactions to my proposal. Some said the proposal was nothing new. They were quick to point to the Argentinian example and how the policy ended in shambles in that country. I discussed some of the responses last week. I also did a comparison analysis to see what went wrong with the Argentinian example and what Nigeria can do differently. The comparison was viewed from a number of prisms, including Nature of Problem; Approach Adopted; Legal Considerations; and Confidence in the System. Let us continue the comparison and also consider other responses I got.
Societal Impact: Argentina’s measures led to unrest. Nigeria’s policy should be fair and consider societal impact.
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Consider other Measures: Besides the policy, Nigeria might look into economic fundamentals, diversify away from oil, and manage forex transparently.
While the situations in Argentina and Nigeria are different, lessons from Argentina can inform Nigeria’s approach. Transparency, legal compliance, societal fairness, and broader economic measures should guide any new policy to stabilise Nigeria’s forex market. My suggestion focuses on a different problem and seems more mindful of potential consequences, aiming for a controlled impact rather than forceful intervention.
Azeem Said:
“Mr. Afolabi, CBN cannot take a unilateral decision to transfer the balances in DORM Accounts to I and E window without considering the individual’s personal need for FX. I may require FX to run my business and also have obligations to fulfill in FX so if CBN does that, I have to be running up and down looking for FX to meet my obligations. (This in itself will shoot the price up)
By nature, money is held for 3 reasons.
1- Transactional motives.
2- Speculative motives
3- Precautionary motive.
These motives underscore the need to keep money and have it handy at any point in time in whatever currency you deal in. If I buy and sell in FX, there is sense in it for me to have cash stored in FX to meet my obligation and CBN cannot compel me to sell when by nature, I should keep funds to run my business.”
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My Response to Azeem:
During the 1997 Asian Financial Crisis, Malaysia imposed capital controls to stabilise its currency, the ringgit. The government fixed the exchange rate and restricted foreign currency transactions. This strategy was controversial but did help stabilize the currency at the time.
Chile has used a combination of interventions, including a policy of managed floatation of exchange rate, currency band system, and reserve accumulation, to maintain the stability of the peso. The country’s careful management of foreign reserves has been seen as a successful aspect of its macroeconomic policy.
The Swiss National Bank (SNB) has, at times, intervened in the forex market to prevent the Swiss franc from appreciating too quickly. This included a commitment to a minimum exchange rate against the euro for a period. The interventions have had mixed successes and have been controversial.
Nigeria’s CBN and government must take charge before things go out of hand.
My proposed domiciliary account control policy will hopefully get to the CBN, the Economic team, and the president himself.
My proposition is very straightforward. If anyone gets paid in USD, you have one week to convert it to naira. If you don’t, it will be converted to naira at the I & E Window rate. No more playing around. If you buy from the parallel market or “aboki,” and you want to pay your vendor, you have one week to convert or else it will be converted at the I&E Window rate. Some of my friends argued that such a policy would make people take the USD underground. Not everybody can because most of us still have businesses, and we obviously need forex. You cannot put your USD under your pillow and vault forever. You will still bring it to the bank at some point or sell it to someone who needs to transact in China or India, etc. I believe that with a policy like this, in a couple of days, we will know the actual value of the naira.
In conclusion, the solution to Nigeria’s forex market’s unpredictability lies in a combination of innovative policy-making, encouragement of local production, and learning from global examples. My domiciliary account control, although contested, offers a novel approach that could tackle the root of the issue. It urges us to look beyond conventional methods, embracing more dynamic and comprehensive strategies. By taking bold and carefully considered steps, Nigeria can work towards a more stable and robust economy, recognising the naira’s true value and strengthening its position as our nation’s sole legal tender.
.Abiodun is the Chief Executive Officer of ZKTeco West Africa, an affiliate of the globally renowned provider of biometric verification algorithm techniques, sensors and software platforms with multiple subsidiaries and R&D centres across the world
