The upward creeping foreign exchange rates: Blame the CBN
In recent times, any adjustment of FX rate by the CBN in an attempt to reduce the gap between the official rate and the parallel rate has always produced equivalent rate increase at the parallel market. This is possible because the Central Bank of Nigeria has failed to recognise that as long as arbitrage opportunities exist, players will take advantage of it. The arbitrage in our foreign Exchange market will vanish when one rate for foreign exchange becomes the norm. The CBN must boldly enter the market and clear all outstanding demand for Foreign Exchange and do it at the existing parallel market rate plus a premium, if necessary.
The CBN should make a plan that may involve sitting with the international lending Agencies and other multilateral institutions to help raise the foreign exchange support needed to make this succeed. They should know that it does not matter whether the CBN intervene in the market with 4 infusions of $100m in a week or a $400m in one day. We need a large infusion to clear the market of all the genuine demand. The impact of a large one-time infusion will have the effect of pushing prices down, as it allows supply to dampen the demand.
Clearing the market in a onetime intervention will take out speculators, as oppose to the drip interventions and the policy inconsistencies we have witnessed in the recent past. The lack of decisive onetime intervention is what is responsible for the upwardly creeping rates. Nobody has the Naira to challenge the CBN if they focus on solving this problem, once and for all. We have wasted over $50bn in the last 5 years defending the Naira. We need to do it as a one-time correction and let the market take it from there.
The CBN has failed to realise that the profit motive is strong, especially when there are people who make money so easily. The difference between selling at official rate to a user and another buying at the parallel market rate, could be substantial. As an example, a new market for pilgrimage merchants exist even when no one will admit to it. These merchants recruit people to embark on pilgrimages backed by supposedly humanitarian benefactor, who sponsor hordes of unknowing pilgrims, who think they are being done a favour, when the real motive is to use them to get allocated FX at a rate that make these merchants instant millionaires. The allocated FX never get to the pilgrims in whose name the FX was allocated. This scam is going on, on both sides, Muslims and Christians are involved.
The CBN acting as supplier and buyer in the market, at the market clearing rate, will have the effect of establishing what the exact rate people are willing to buy and sell the Naira. We should not deceive ourselves; nobody knows the correct rate for exchanging the Naira. We must let the market do it. The price mechanism is the best-known moderator for market efficiency. Nobody could have predicted today’s rate of N475 to the Dollar. It is obvious that we have not been productive as an economy. Only productive economies have strong currencies. Germany exports $155bn yearly, that is why it supports the Euro currency strongly.
Until we make export important in our economy and produce locally what we consume and not spend our scares foreign exchange earnings on importing things we can produce, our productivity will always be low and the impart will always be in a devalued currency. The Japanese’s currency the Yen, exchanged for ¥ 480 to $1 in 1980, today it exchanges for just ¥105 to $1. Honda, Toyota and the Japanese exports bring in enough foreign exchange into the economy to give value to the currency. The difference in the last 40years, is that Japan exports 1 in every 4 cars sold in the world. There is no magic about what has happened to their currency. We must let the Naira find its level and it can only be supported by the productive efforts of our economy. The Naira once exchanged for $1.70 to the $1 in 1980.
At the time, Nigeria produced rice it consumed and even exported some to earn Foreign exchange. It refined its crude oil and did not need to spend the huge sums it spends today in importing petroleum products. It Assembled vehicles in Kaduna, Ibadan and Enugu with many of the major spare parts manufactured in various regions in Nigeria. We must go back to that era if we are to develop and make the Naira have any value. Fortunately, we have what it takes to produce for our consumption. In some cases, even have the comparative advantage, like in Agriculture.
We have put ourselves in this predicament. We must work to take ourselves out of it. The one who is already down, fears no fall. If the Naira rate goes to N500 today, it will not make any huge difference, it will be expected and its impact will be any harder than it is now. We should not expect anything to change soon, with the bloated governments we run., it is wasteful and very unproductive. The grandiose expensive government we run, is daily more expensive with no effort to cut down on its wasteful and corrupt practices. The government daily ask the citizenry to tighten its belt while government does not see any need cut down on its own expenses.
The CBN should be in the market ready to buy or sell at the ruling market price. The current creeping rates is detrimental to the economy. Economic players are more concerned about the stability of rates than the rate of exchange. A stable rate, allows for planning and will ensure efficiency as users of foreign exchange will focus on the most efficient way to use what they can afford in foreign exchange, when market prices prevail. Some will find local substitutes for input into their production. Some will raise prices where the market can take it.
Where the market cannot take it, they should be allowed to go out of business. The consumers of that product will find alternatives locally. The consistent adjustments will make the economy more productive and efficient. On the supply side, the higher exchange rate will force people to do things that will allow them earn foreign exchange. Foreign investors will find new opportunities in the Nigerian economy and will seek to invest here. As the economy adjust to the initial shock, it will find the proper price equilibrium. My prediction is that, we will experience an initial spike in prices but that will eventually adjust downward and will finally stabilise.
This will happen when the CBN find the courage to do the needful, get rid of the power it is now protecting, to be the decider of who gets foreign exchange at what rate. Their role should be that of a participant in the market and a price taker for buyers and sellers. They should not be blackmailed into the usual thinking that any special segment of the market should be protected. Any business that cannot support its business at the prevailing market FX rate should be allowed to die. They should either find a way to earn foreign exchange to support their business or start a new business.
The CBN should not listen to the usual fears of unemployment increasing, we already have over 25 percent of our population unemployed. Only steady policies, with a government ready to cut cost of governance will increase employment. The government must also buy FX at the same market rates like everyone else. That will ensure that they spend it only on necessities and not the usual frivolous trips and the inflated contracts they put our scares resources to. Only in taking this path, will we hope to have a strong Naira. Let the CBN act in the interest of all.
Ogiemwonyi is a retired Investment Banker, and writes from Lagos.