By Henry Boyo
A QUESTION and answer format is adopted in this article to examine issues related to the recent DSS raid on Bureau de Change (BDC). Please read on:
Question: What do you think about the CBN’s policy that allowed BDCs to buy dollars at N381/$ and sell at a maximum of N400/$.
Ans: It is not appropriate in the first place for CBN to either define the exchange rate or to determine what rates are applicable in the market. The wide disparity between official and parallel market rates is the result of CBN’s reluctance to relinquish its oppressive monopoly on the foreign exchange market. Invariably, monopolists will distort market prices in any sector.
Question: It was reported that the officials of the Department of State Services (DSS), on 9th November, 2016, raided the offices of some BDCs, for selling above stipulated exchange rate. What do you think about this move by the CBN?
Ans: There will be no need for CBN or the DSS to harass the BDC operators in the first place, if CBN allows the exchange rate to be determined by the usual forces of demand and supply. The raid on BDCs is infact a deliberate distraction, so that the blame for price distortions will be transferred to BDCs rather than the real villain, which is the CBN. The CBN’s monopoly triggers a spiral of negative consequences such as the widely divergent prices in the forex market; the Apex bank is certainly aware of the odious role it plays, but they hope Nigerians cannot see through the veil of deceit.
Question: Why do you say the CBN Monopolises dollars?
Ans: The CBN controls over 80% of dollar sales in the market, so by definition and practice, CBN is therefore a monopolist in the forex market. Invariably, unfair pricing, rent seeking middleman, hoarding products, scarcity, are some of the market distortions caused by monopolists everywhere.
Question: do you think this action of the CBN will affect foreign exchange in any way?
The DSS raids may not be sustainable and may ultimately become a source of “chop-chop” for the Security agencies. Consequently, whatever gains the Naira exchange rate records, will only be temporary, so long as the fundamental and deliberately created market distortions persist.
Question: in your opinion, how do you think the CBN can better control the exchange rate?
Ans: The CBN must urgently relinquish its oppressive monopoly in the foreign exchange market. The CBN’s monopoly unnecessarily induces dollar scarcity which exists, simultaneously with a burdensome market surplus of Naira liquidity which the CBN does not deny.
Consequently, so long as the CBN continues to deliberately auction small rations of dollars, in a market suffocated with naira surplus liquidity, it will be virtually impossible for the Naira rate of exchange to be stronger (even if the prices of crude oil rises to $200/barrel) and the gap between the black market and the official rate will always remain fairly wide apart.
Besides, it is a no brainer that anything that is auctioned will only be sold for the higher or highest bids. So, CBN will sell its dollars to those who are ready to pay more Naira, in other words, CBN’s auctions invariably weakens the Naira exchange rate.
Question: What is the major cause of this excess liquidity?
Ans: For over 20 years, government has been monetizing its dollar receipts from crude oil export. This means that fresh Naira values are created by CBN and injected into the system as Naira allocations of dollar revenue to the 3 tiers of government. So, the more dollars we earn, the more Naira (with depreciating values) become available in the system to drive higher prices of goods and services(inflation).
Consequently, when CBN also auctions rations of dollars in such a market, it is inevitable that the Naira rate will continue to be threatened.
Question: So how do we minimize or eliminate excess liquidity?
Ans: The CBN can reduce excess liquidity by paying higher interest rates to induce banks to part with the surplus cash in their custody. But this approach will always increase interest rates and crowd out the real sector from access to cheaper investible funds.
Additionally, the CBN could further raise the mandatory Cash Reserve Requirement of banks, so that banks will have reduced access to their cash holdings; although this option does not create any significant direct cost to government, however, higher CRRs will constrain the capacity of banks to fund businesses and grow the economy.
Question: So, what is the way out?
Ans: Well, ironically, unless CBN minimizes or indeed eliminates the practice of paying double digit interest rates to reduce the perceived excess Naira supply primarily held by banks, (in the guise of ‘mopping up’ Naira liquidity), Nigeria’s economy will continue to underperform.
However, the CBN can steadily reduce the huge cumulative burden of liquidity created over several years by ceasing to substitute Naira allocations for distributable dollar revenue.
Instead, beneficiaries of the Federation pool should be paid with dollar cheques/certificates or warrants. This process will restrain further Naira creation that drives excess Naira liquidity; higher CRR could simultaneously also be imposed on banks to support the draining of the excess liquidity that drives inflation and high cost of borrowing.
Question: So how will this make the Naira stronger?
Ans: Beneficiaries of dollar cheques will be expected to convert their dollars to Naira through commercial banks’ subsisting cash holdings, which can be modulated as required with appropriate CRR by CBN. In this option, you will recognize that increasing dollar revenue does not translate to increasing Naira liquidity unnecessarily. With this approach, we will ultimately begin to see a change in the forex market dynamics as more dollars appear to chase dwindling Naira liquidity.
Furthermore, the CBN would no longer need to auction dollars against the Naira, to threaten the Naira exchange rate. Infact, the reverse will be the case and the Naira exchange rate will gradually begin to firm up.
Question: Is it not possible that issuance of dollar certificates to states and MDAs will facilitate Capital flight?
Ans: No, it won’t, because the beneficiaries cannot collect dollar cash with their certificates, they can only collect the Naira equivalent from the commercial banks at the open market exchange rate.
The dollars will always remain in the domiciliary account of Public beneficiaries with the CBN, who will then directly act on the instruction of banks who purchased the dollar certificate for disbursement. Similarly, other beneficiaries of dollar allocations, paid with certificates, will equally submit attested invoices for officially valid transactions to CBN for remittance of respective invoice values to overseas beneficiaries.
SAVE THE NAIRA!! SAVE NIGERIANS!!