By Les Leba

Certainly one of the most frequently asked questions on the advocacy for the adoption of a ‘demonopolised’ foreign exchange market is how it will operate and the benefits of such a model.  Therefore, let us first examine the validity of the advocacy and subsequently define its modus operandi.

The question of validity is best answered in the following excerpts from the Vision 2020 document, which reads thus:
“MONETARY POLICY THRUSTS:-Dealing with the EXCESS LIQUIDITY CHALLENGE requires innovative approaches, in view of the source of the problem.

One potentially ENDURING SOLUTION, which would avoid the CREATION OF NEW MONEY and boost the NAIRA VALUE in the foreign exchange  market, RELATES TO THE ALLOCATION OF FOREIGN EXCHANGE EARNED FROM OIL TO THE THREE TIERS OF GOVERNMENT RATHER THAN MONETISING IT.  But this may be a recipe for capital flight.  Therefore, the Central Bank would need to develop capacity for LIQUIDITY FORECASTING AND PROGRAMMING.”

Thus, the authors of the Vision 2020 blueprint agree that the scourge of excess liquidity derives from CBN’s capture of dollar earnings and subsequent substitution of naira in monthly allocations.  Vision 2020 also recognises that the evil train of consequences viz: high cost of borrowing – above 20%, inflation at 15%+, collapsing industrial landscape and increasing unemployment are caused by the villain of excess liquidity.

Furthermore, the blueprint concedes that direct payment of dollar allocations to beneficiaries would bring an enduring solution, which would avoid the creation of new money and instigation of excess liquidity, and also boost the naira value.  The only objection in Vision 2020 to the advocated solution of dollar payment for dollar-derived revenue is that it could lead to increasing capital flight.

Consequently, it recommends that CBN should develop capacity for liquidity forecasting and programming.The failure of such strategy is amplified in our current reality of 12% Monetary Policy Rate with cost above 30% and a rate of inflation that may exceed 15%.

It smacks of mischief to suggest that a deregulated foreign exchange market would encourage capital flight because the current payment mode of naira substitution for dollar revenue more readily engenders capital flight as the constant deluge of naira created by CBN often outstrips dollars available for sale by ratio of 10:1.

The depreciating naira value caused by this poisonous price mechanism creates loss of confidence in the naira and instigates a preference for dollar holdings.  Indeed, allocations of raw dollar cash may initially lead to leakages; however, the adoption of dollar certificates will firmly shut the door against weakening naira and encourage confidence in naira, and also reduce speculative purchases of dollars by banks and investors.

Lamido Sanusi, CBN governor

Payment of allocations with dollar certificates will make it easier to track and monitor the usage of all dollar allocations, as the dollars will remain under the exclusive custody of the CBN, who will accredit and manage the domiciliary accounts of commercial banks and all constitutional beneficiaries of dollar allocations.  Furthermore, the CBN would also directly make dollar remittances to exporters of only bona fide goods accommodated by government’s imports policy.

The following is an explanation of the operation of a deregulated foreign exchange market, culled from the mother paper of this advocacy titled “A Liberalised Foreign Exchange Market: a proposal for a liberalized foreign exchange market in Nigeria and its economic benefits”_ Boyo/Adaighofua, which was presented to NEIC in 2002.  Please read on.

OPERATION OF FOREX MARKET IN A LIBERALIZED SYSTEM
The current market structure creates  a system where too much naira always ‘appears’ to be chasing the too few dollars available.  Such a system can only result in a continuous downward slide in the value of the naira vis-à-vis other stable and convertible currencies, because by the nature of this system the available dollars will no matter the quantum always continue to remain TOO FEW, since its control and disbursement remain in the same hands that also control the volume of our own naira in circulation!  A case of the prosecution and defence being one and the same person!

HOW THE MARKET WILL OPERATE
The CBN will consolidate the distributable portion of the dollar earnings monthly in arrears.  The realizable values will be published in appropriate government bulletins monthly. The CBN would issue warrants denominated in dollars monthly without fail to each beneficiary of federally derived dollar revenue according to constitutional provisions with regard to sharing of such revenue.

The beneficiary of dollar warrant (strictly not cash) (federal, state, local governments, statutory agencies etc) will approach their separate bankers with their dollar warrants for conversion of all or part of the dollar warrant into naira for those budgetary obligations which cannot be paid for in dollars (since dollar is not legal tender in Nigeria)
All buying and selling of currencies will be carried out through a money deposit bank.  The local bank officer on receipt of the request would seek current rate confirmation from its head office before concluding a deal.

The CBN’s ruling rate on any particular day will be determined by the weighted average of various negotiated prices on the preceding day.  A true naira rate would emerge from the aggregates of rates adopted in all such exchange transactions in the federation.  Negotiated naira buying and selling prices of dollar from the numerous outlets or sources would stabilize within a narrow band and produce an effective market determined naira exchange rate made up of the composite or weighted average of various prices.

The rate that would emerge would be dependent on the CBN’s management of the naira supply in the economy through the various traditional instruments, which had remained ineffective and counterproductive in the past – viz:
-Minimum Rediscount Rate
-Commercial Bank Liquidity/cash Ratio
-Treasury Bill Issue
-Asset Ratios etc, etc, etc.

This system will create a scenario where too much dollars ‘appear’ to be chasing too few naira as the CBN guides the value of the naira towards a level that would be consistent with dignified expectation through appropriate regulation and fine tuning of traditional Central Bank instruments worldwide – without jeopardizing liquidity and the adoption of other drastic measures (such as double digit MRR) which are retrogressive to the economy to tame sham excess liquidity!  A realistic and stable exchange rate would drastically check inflation and encourage industrial capacity utilization and expansion.

PAYMENT FOR IMPORTS AND FOREX AUCTIONS
All foreign exchange revenue derived from the federation will continue to be domiciled with the CBN. Each financial institution involved in forex business, particularly commercial banks and all beneficiaries of statutory allocation will maintain a domiciliary account with the CBN.  Purchase of forex under this system will be for payment for goods and services approved as per government import guidelines.

All importers would approach the local branch of their (buyers) bank and submit their request for purchase of forex at prevailing market exchange rate.  With the full naira cover in their account, a letter of credit will be opened on their behalf with the overseas correspondent bank of the local bank.  The usual CBN’s Forms ‘A’ and ‘M’ will of course be completed for monitoring and statistical purposes.

Details of each transaction will be filed with the CBN so that the domiciliary account of each bank with the CBN will be reconciled and further instruction on disbursement effected when received.  Private sector importers with dollar denominated domiciliary accounts (for example exporters) will complete necessary import documentation at their banks.

Copies of the documents will be forwarded to the CBN for statistical consolidation.  Their dollar accounts with their banks will be debited with the import value.  Records of daily balances and movements in domiciliary accounts in the private sector will be filed with the CBN.

Public sector importers with balances on their dollar warrants will similarly complete necessary import documentation at their banks (for goods and services that are in conformity with government’s import guidelines).  Receipt of completed forms by CBN will serve as instruction for their domiciliary accounts with the CBN to be debited to the import value.

All exporters with dollar denominated accounts would not be required to sell their dollars on receipt only to repurchase the same dollars through the exchange market for their import requirements.

Prime import documents such as Bill of Lading, Packing List and Original Invoices must be attested by the customs authority from the country of shipment or origin as the case may be before shipment to Nigeria.  In addition, all imports will be subject to 100% physical destination inspection to check misappropriation of forex purchased.

There would no longer be a formal elaborate central bidding system under any guise whatsoever for the determination of the naira rate of exchange.

Banks will only earn a commission or  a spread between buying and selling rates and all  transactions must be properly documented and returns provided to the CBN daily.  The permissible arbitrage payable to banks for buying and selling of foreign exchange should not exceed what obtains in capital market internationally.  The central bank will retain an audit team in banks and other financial institutions to collect data on all transactions of interest to CBN operations to ensure commercial practices are in line with Central Bank regulations and expectations.

The CBN audit officers will be expected to send daily audit returns to the appropriate CBN dept responsible for monitoring and evaluating forex transactions as well as other such specific information required by the CBN. The presence of the above resident audit officers is without prejudice to the existence of other CBN investigative and monitoring teams dedicated to ensure compliance in the money market.

The portions of the public sector  dollar warrants which have not been sold to the banks in any month would remain as reserve or savings in their domiciliary account with the CBN and the beneficiary can convert such into naira at any time the agency chooses at whatever the prevailing rate of exchange with the dollar at his local bank after the usual offer and acceptance process, accompanied with the appropriate import documentations properly completed.

If and when it promotes desired economic objectives or targets, the CBN can draw on the foreign reserves by selling part of its earned dollars to meet any unsatisfied demand for foreign exchange at the exchange rate set by the market.

Commercial banks as well as selected bureau de change will be co-opted to buy and sell travellers cheques demanded by the travelling public. Denomination of payments for all government tariffs and fees should be strictly in naira. Liberalized foreign exchange market or better Next week, we will examine the dividends of a liberalized foreign exchange market.
SAVE THE NAIRA, SAVE NIGERIANS!!