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CBN’s pseudo liberalisation of forex market

By Les Leba
There is a general saying that     when a lie is repeatedly trumpeted without any refutation as a result of apathy, ignorance, fear or self-interest from any quarter, sooner than later, even the ‘lie makers’ will believe their lie and the lie will become the truth in the general consciousness. So it has become with Central Banks’ touted Liberalisation of our country’s foreign exchange market since this dubious scheme was unveiled in May this year (2006).

“Speaking at the opening of the 8th Annual CBN Seminar for Finance Correspondents and Business Editors in Kaduna, the CBN Deputy Governor – Economic Policy – Dr Obadiah Mailafia in his paper “The Dynamics of Exchange Rate Management in Nigeria” rightly maintained that “inappropriate interest and exchange rate, as well as strong infrastructural support are some of the major reasons why the nation’s economy has remained unproductive.  We must get the fundamentals correctly i.e. appropriate interest and exchange rate stability; we need strong government support” (Daily Independent 29/8/06 pg A3).

“In another paper presented at the same Kaduna Seminar, Mrs. Omolara Akanji, the CBN Director (Trade & Exchange) celebrated the convergence between the erstwhile divergent exchange rates in the multiple foreign exchange markets in the country.  Mrs. Akanji boasted that the apparent confluence signaled effective foreign exchange management (Daily Independent, 30/8/06, pg C 2).

The CBN Director confirmed that convergence was brought about by its recent liberalization of the foreign exchange market.  Under the liberalization agenda, the banks are now allowed to purchase foreign exchange based on their speculative estimates of their customers’ foreign exchange demands in place of the old DAS (Dutch Auction System) where the banks could only buy foreign exchange from the CBN based on the expressed demands and prior cash commitments of their customers.  In other words, under the new system (Wholesale DAS or WDAS), the banks are now free to legally actively trade in foreign exchange as a complement of their other lending activities.

“As a further demonstration of a liberalized foreign exchange market, the CBN has also removed the documentary controls that inhibited patrons of the black market from accessing relatively cheaper officially sourced dollars from the commercial banks.  In anticipation of an upsurge in the demand for official foreign exchange, the CBN rose up to the challenge by allocating $400,000 to each registered Bureau De Change (BDC) in the country.  The banks have eagerly responded to this bonanza by launching BDCs as part of their branch network management throughout the country.

“It goes without saying that if 1000 BDCs in the country took up their weekly allocation of official foreign exchange, the CBN would be funding what was formerly a relatively insignificant black market with about $1.6bn per month It is unlikely that the foreign exchange requirement of bona fide manufacturers and commercial stakeholders, who in line with government policy, consume such enormous values of foreign exchange monthly.  In most economies, BDCs serve the petty needs of tourists and transient customers.  Besides, the Central Banks of these countries do not promote a policy of direct funding of BDCs and their industrial and commercial operators are expected to patronize commercial banks so as to moderate capital flight.

Curiously, our own CBN, on its part has thrown its forex treasury to the ‘informal’ users of foreign exchange and facilitated their access to the treasury by removing documentary and other policy obstacles!  In other words, it is more cumbersome for real sector operators to access official forex but much easier for treasury looters and smugglers of import prohibited goods!   For example, in spite of the fact that less than 5% of Nigerians earn up to N2m annually,  the CBN has approved up to $16,000 (about N2m) as travel allowance for every Nigerian who wishes to travel as far as Cotonou up to four times every year!  Needless to say, the magnitude of the beneficiaries of this travel allowance largesse defy the reality of the wage structure in the country.

“What is apparent from all the above is that the CBN appears overwhelmed by its new found seemingly ‘inexhaustible’ pool of dollars as a result of the fortuitous exceptional rise in crude oil prices in the last 2-3 years.  Indeed, the euphoria of a huge dollar bank balance may have induced CBN’s policy of liberalization of the foreign exchange market, which regrettably has translated in practice to an irreverent dispersal of our foreign exchange earnings with the nebulous objective of convergence of the rates in forex markets.

“Meanwhile, a truly liberalized market is one in which there are many sellers and many buyers!  A situation where only one source supplies over 80% of a commodity in any market, would most certainly be expressed as a monopoly.  Now, in all the several official foreign exchange markets conducted in Nigeria, including the current, surprisingly acclaimed WDAS, the CBN ultimately sells over 80% of the foreign exchange in the market through one framework or the other, which will not change the basic structure of a market monopoly.

“The next question is how does the CBN always turn out to be the market champion?  The answer is that the CBN would always end up with such huge amount of dollars to sell, because it currently arrogates the right to capture the significant dollar component of monthly distributable revenue to the three tiers of government while depositing what it considers an appropriate volume of naira into the bank accounts of constitutional beneficiaries.  Needless to say this action constitutes the perennial bane of excess liquidity in our monetary system!  It is odd that our monetary authorities have not considered that an increase in commercial banks’ cash reserve ratio would have achieved the same purpose without such trauma to the economy and such high cost.

“However, if the CBN does not reserve the right of seizure of the dollar component of distributable revenue, then the real beneficiaries, i.e. 36 states, 774 local governments, the federal government and agencies would be issued with registered dollar certificates (not cash) for their portion of monthly distributable revenue for negotiation as and when they want with the licensed commercial banks.  Such a framework would decentralize CBN’s hold on the foreign exchange market and evolve into a truly liberalized foreign exchange market and the nation can save over N70bn in interest costs for the treasury bills and bonds issued by government every month to mop up self-inflicted excess cash in the system and constrain commercial bank lending for consumption, according to the CBN Governor!

“The resultant liberalized foreign exchange market would create a progressive and dynamic market economy as interest rates will crash to single digit in the absence of the ghost of excess liquidity; the investment climate would be galvanized as the dynamics of a much reduced naira supply pitched against multiple holders of dollar certificates will produce an appropriately priced and stronger naira.  Manufacturers can retool and bring in machinery and raw materials at cheaper costs; a stronger naira will mean cheaper petrol and a spiral reduction in the inflationary trend.

Although Dr. Mailafia at the CBN seminar cautioned against a rapid appreciation of the naira, as he feared that this would obstruct export diversification, it is necessary to emphasize that as things stand, our income from crude oil, which provides over 90% of national revenue is not influenced in anyway by the local exchange rate of the naira.  Our exchange rate has depreciated from stronger than one to one to the current N128=$1 today(2006); meanwhile, our export base does not show any significant level of diversification, yet the lower value naira has decimated the middle class and reduced most Nigerians to an income of less than $1 a day!

“In any event, it is foolhardy to expect export diversification with current poor infrastructural base, with 20% commercial lending rates and an exchange rate that makes importation of locally unavailable machinery and raw materials too expensive for our small and medium enterprises, which form the bedrock of our economic development.”

The above article was first published in October 2006, soon after the CBN launched its version of a liberalized foreign exchange market.  I recall my consternation as the details of CBN’s liberalization programme were unfolded in the course of that year.  Indeed, the Minister of Finance and CBN Management were already uncomfortably aware of our criticism of the obtuse nature of the foreign exchange market from the content of the paper “A Liberalised Foreign Exchange Market: a proposal for a liberalized foreign exchange market in Nigeria and its economic benefits” – Boyo/Ojomaikre, which was presented to the National Economic Intelligence Committee in August 2002.  Over 4000 copies of this paper have been circulated amongst critical stakeholders in Nigeria.

In spite of the impeccable logic and the strength of our argument for a liberalized forex market, the CBN and the Finance Ministry under its IMF surrogates overtly remained impervious to reason and the government team carried on the deliberate process of destroying our economy at a time that huge export revenue was our blessing.

The surprise on my part was the fact that CBN’s forex market liberalization was a far cry from the articulated proposal in our paper under reference.  Indeed, CBN’s liberalization was a veritable tool to promote capital flight, and capital indeed went out in droves between 2006 and 2009 in response to CBN’s liberal market structure, which incidentally was one of IMF’s preconditions for the controversial Paris Club debt exit.

Fortuitously, within that period, crude oil price touched an all time high of $150/barrel and our best ever reserves base of over $60bn became a revenue target for our international finance overlords!  Today, the result of CBN’s liberalization of the forex market is evident as humongous capital had indeed exited our shores; our industrial landscape is now further disenabled with commercial lending rates at 20% while inflation remains unrestrained, with the prices of the average family food basket continuously rising at over 15% every year.

In addition, our debt has risen once more to close to $30bn and interest payments are projected at N500bn while fuel subsidies may exceed N600bn in year 2010!

Today, the same international group of beneficiaries of our erstwhile best ever reserves have come back with fresh assurances of their readiness to lend us more dollars to ‘revamp’ our economy;  they even encourage us to increase government’s proposed $500million Eurobond by over 100%!!  Did I hear someone say that we have been down this road before?  Yes, you are right, it is De Ja Vu!!  The naira is once more under severe pressure and the gap between official and bureau de change rate has gradually widened by as much as N5 per dollar!


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