The invisible hands in the fall of the naira

On Thursday 11th July the Naira lost N29.4 and N20 against the dollar at both official and parallel foreign exchange markets, that’s just in a single day, it closed the week on a negative note at the FX market, depreciating to #1563.80 against the dollar from #1530 per dollar the previous week (According to FMDQ data). Is the naira about to continue its depreciation spree against the dollar or it’s too early to judge?

Knowing all that happened in the heavy volatility period the currency experienced following its floating and attempted liberalisation of the Foreign Exchange (Fx) market in June 2023 up till May 2024 and how the CBN was running helter-skelter with circulars and measures issued in a decisive and authoritative manner, shoving up our external reserve to $34.66 bn(highest in last 13 months) , plus the several interventions done in the market. The CBN has however done a praiseworthy job and the presidency must be proud of its men. The question is, are we there yet? Did we tame the ocean, or we only calmed the storm. Honestly the falling of the naira isn’t yet over, as there are two visible hands yet to be addressed in all this. I would mention one in this article and the second one, by God’s will next week.

“Honestly the falling of the naira isn’t yet over, as there are two visible hands yet to be addressed in all this.”

The First is the nature of the parallel market we have in Nigeria and its powerful operators. This is one of the major causes of the sharp depreciation of the naira in the FX market. When we did a free float in June 2023 the CBN and its supporters argued they wanted market forces to determine the price of the currency and that the market should be liberalised, but there is something fundamentally wrong with this, the nature of our parallel market.

Read also: Naira’s stability pinned on sustained dollar sales by CBN

The parallel market plays a lead role in the Nigerian Fx market due to volume of transactions plus the occasional scarcity and bureaucratic bottlenecks in the official market. The market structure we have created where we have the official market and parallel market standing side by side (where the latter dominates) is one in which you cannot have free operation of market forces. When people make argument for the liberalisation of the market, they assume we have a perfectly competitive market (i.e.. where participants are atomistic – each too small to influence outcome -, there is freedom of exit and entrance etc.) where supply matches demand to clear the market at an equilibrium price, but in Nigeria we do not have such a market, what we have is a handful of large operators who determines the price based on personal greed and not on market forces of demand and supply.

Besides, the Nigerian foreign exchange market was not designed in such a way. The market was initially designed such that the CBN plays the role of a Visible hand – major supplier and consumer of Forex and on occasion, interventions to ensure stability in the market. In response to pressures for the market to liberalise the monetary authorities have ceded away part of the CBN’s regulatory powers in creating an autonomous segment of the market that has unknowingly led to prosperity of the parallel market and emergence of visible hand in the hands of private individuals/institutions who can independently of the CBN determine at what price to purchase and sell our local currency.

The naira has continuously been depreciating over the last 40 years (frankly since the inception of the market in 1986), and the parallel market has always taken the lead in its depreciation. According to Prof Sam Olofin, a retired prof of economics he said regarding the Nigerian Fx market “The kind of market we have at best is Oligopoly….. ”. Clearly for as long as we have a sophisticated parallel market standing side by side with the official market, we can’t have a stable naira. However, our laws recognize the parallel market being outside the purview of the CBN, and knowingly or unknowingly over-protect it.

So how do we solve this problem, well a starting point would be to amend the foreign exchange control act 1995, reading the act it feels as if it was drafted by saboteurs or enemies of this state. Part I section 3 of the act says, “Except as required under any enactment or law, a person executing a transaction in the Market shall not be required and, if required, shall not be obliged, to disclose the source of any foreign currency to be sold in the Market.” This is worrisome for a market that is known with round tripping and fraudulent Fx requests from official sources.

Another part reads “The rate at which each transaction in the Market shall be executed shall be the rate mutually agreed between the applicant purchaser and the Authorised Dealer or Authorised Buyer concerned” this puts one of the most important sovereign symbols and store of value in the hands of private individuals. Lastly punishment for contravention of the act feels like child’s play as part I section 3(2) says

“No foreign currency imported pursuant to this Act shall be liable to seizure or forfeiture or to suffer any form of expropriation by the Federal or a State Government except as provided under this Act.” as it stands you’ve got nothing to lose even if you get caught in Fx shenanigans.

Last Thursday, the senate rejected a proposed bill titled “The Foreign Exchange (Control and Monitoring) Bill, 2024 (SB. 353),” which was sponsored by Senator Sani Musa, chairman senate committee on Finance, it sought to provide regulations and supervision for transactions conducted in the foreign exchange market. I have not read the bill as it is not publicly available, and I do not know whether to be excited or worried. The bill was however struck out from proceeding to second reading, where the senators cited potential overlap of the forex market with the Central Bank of Nigeria (CBN’s) existing control over the market, which could lead to confusion and generate counterproductive outcomes.

Like I have insinuated earlier, the CBN only has a superficial control over the Forex market, which is complex and inefficient. There is a desperate need to have a properly regulated market that brings openness and transparency by all operators and specifies punitive measures for illegal activities, saboteurs and speculators otherwise the naira could collapse. The senate president however suggested further consultation, this i agree with, if the bill is aimed at genuinely addressing the issues facing the naira, senator Sani Musa needs to carry more stakeholders along through public engagement on this topic among others.

Sakariyah Suleiman is a qualified Accountant (ICAN) with interest in public policy, economic research and Investment finance. [email protected]