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The unending woes of Naira exchange rate

By Omoh Gabriel

The pressure on the naira at the foreign exchange market might continue to mount and see further depreciation in value of the naira this year. The Naira fell by 200 kobo on Tuesday, as the parallel market exchange rate rose to N180 per dollar from N178 per dollar on Monday.

The depreciation was due to scarcity of dollars in the market. Banks refused selling dollars to Bureaux De Change (BDCs) thus aggravating the scarcity in the market. Parallel market rate rose from N177.3 to N180 per dollar because there was no dollar in the market. The depreciation of the naira is not limited to the dollar; it has been depreciating against the Euro and Pound Sterling in recent times too. The exchange rate of the Euro has risen to N220 from N117 last week.

This is the trend that has become the lot of the local currency since the introduction of Structural Adjustment Programme by the Babangida military junta. The introduction of SAP saw the massive devaluation of the local currency and the enthronement of a free float for the naira.

naira-DollarThe mistake made by the monetary authorities since the deregulation of the economy has lingered and the CBN has not been able to muster the courage to correct the anomaly. At the inception of the famous deregulation of the foreign exchange market, the CBN introduced three tier markets for the same commodity, foreign exchange. There was the first tier market which was the official rate at which the government buys foreign exchange from the CBN.

There was the Second tier market where the private sector and other individuals were sourcing their foreign exchange requirement from. The third was the autonomous foreign exchange market where exporters put the proceeds of their exports and sell same at their own determined rate.

However, there existed and still exists a parallel market where un-licensed individuals hawk foreign exchange along major streets in Nigeria and in mosques. The rates that ruled these markets were never the same. In fact, there have been multiple exchange rates in the economy since the deregulation. This gave room for foreign exchange speculations that resulted in excess demand for foreign exchange. Nigerians, banks and others have been hedging against depreciation ever since. As of today, the demand is high because those who have the resources are buying dollars for keeps in anticipation of possible devaluation of the naira as a result of declining oil prices.

In economics, there is what is regarded as shadow price of a controlled product. The shadow price usually is the price that is envisaged if the product were allowed to find its true value in a free market setting.

As a result of the shadow price of the naira, the international business community soon began to agitate that the currency was over valued and that the true exchange rate of the naira was the parallel market rate. Nigeria then continued to adjust the currency from N2.02 to the dollar in 1986 to the N173 today. In 1987, the exchange rate was N4.02 to the dollar and in 1988, it had moved along the parallel market rate of N4.54. The economy was still on its knees as the exchange rate moved further in 1989 to N7.39 and in 1993, the two markets were merged at N22.05 to the dollar. By the turn of the century in 2000, the exchange rate was N102.10 to the dollar. By 2002, the exchange rate of the naira to the dollar was N121 and in 2004, the rate had peaked at N133.

The handling of the exchange rate has been questionable. Why will there be two exchange rates in an economy? Why must there be an inter-bank exchange rate? What makes it so difficult for the foreign exchange market to be totally deregulated? If right at the beginning there was one exchange rate, the naira may not have suffered the way it has. It definitely would not have been a whipping currency that it is today.

On July 17, 1988, the naira appreciated in value against other major currencies after the bidding session at the Foreign Exchange Market (FEM). An exchange rate of N3.50 to $1.00 emerged as the rate for sale of foreign exchange. Nigerians admit that the country’s most dominating economic problem is the current shortage or scarcity of foreign currency.

In the management of the exchange rate, it is the Second-tier Foreign exchange Market that has always brought the Central Bank of Nigeria (CBN) in conflict with the banks. At the introduction of the deregulation of the foreign exchange market, some new generation banks were barred from SFEM bidding sessions for submitting bids that were said to be too high. Last week, the CBN bowed to banks’ demand for the removal of the 10 kobo margin limit imposed on intervention dollars.

At a meeting between the CBN and chief executives of banks, the CBN agreed to remove the 10 kobo margin limit on intervention dollars. Intervention dollars are dollars sold directly to banks by the CBN to stabilise the exchange rate of the Naira in the inter-bank market. Three weeks ago, the CBN imposed 10 kobo margin limit on intervention dollars.

“Funds purchased through the CBN interventions should be utilised within two working days of delivery at a rate not more than 10 kobo above purchase rate. Consequently, intervention funds not utilised within two working days of delivery should be returned to CBN at the original purchase rate,” the CBN said in a circular signed by Mr. I.O Gbadamosi, Director, Trade and Exchange Department.

The limit, however, made the intervention dollars unattractive to banks and as a result, they stopped purchasing dollars from the CBN. This frustrated efforts of the apex bank to curtail depreciation of the Naira in the inter-bank foreign exchange market, leading to N7.45 depreciation of the national currency last week. To arrest this development, the apex bank called a meeting of chief executives of banks to discuss recent developments in the foreign exchange market and its effort to stabilise the exchange rate. The banks’ CEOs made it clear to the apex bank that the 10 kobo margin limit has to be removed for banks to purchase the intervention dollars. As is always the case when there is crash in oil prices, the CBN officially depreciated the naira to N156 to the dollar.

The naira will achieve a realistic exchange rate when the demand for foreign exchange is matched by supply. Nigeria has not worked hard enough to make this happen as the economy continues to depend on oil.

Year           Rate (N:$)     Depre./

Appre. (%)

1973                      0.66                       –

1974                      0.55                       -20.0

1980                      0.55                       0.0

1982                      0.67                       17.9

1984                      0.76                       11.8

1985                      0.89                       14.6

1986                      2.02                       55.9

1987                      4.02                       49.8

1988                      4.54                       11.5

1989                      7.39                       38.6

1990                      8.04                       9.3

1991                      9.91                       18.9

1992                      17.30                    42.7

1993                      22.05                    21.5

1994                      21.89                    -0.7

1995                      81.20                    73.0

1996                      81.20                    0.00

1997                      82.00                    1.0

1998                      84.00                    2.4

1999                      93.95                    10.6

2000                      102.10                 8.0

2001                      111.93                 8.8

2002                      121.0                    7.5

2003                      129.3                    6.4

2004                      133.5                    3.1

2005                      131.1                    -1.8

2006                      128.5                    -1.98

2007                      127.4                    -0.86

2008                      117.81                 -7.53

2009                      148.20                 +25.8

2010                      150.19                 +1.34

2011                      154.5                    +2.87



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