The unresolved burden of 5 rates of naira to the dollar

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By Henry Boyo

The strength of a nation’s currency is an expression of the vibrancy, and robustness of that country’s economy.   Conversely, a very weak currency therefore is a mark of a country with a perverse economic mix.

Our currency has plummeted in 30 years from 60 kobo=$1 (when we could not be described amongst the world’s poorest) to the present N132.80=$1, to now become classified amongst the world’s poorest, even when our $17billion reserves is the highest in 30 years!   What a veritable paradox, alarmingly nonetheless, there is still no tangible impact on social welfare.

A country’s economy is considered to be relatively stable if its foreign reserves readily cover up to six months of imports; thus, a nation’s export competitiveness and consequent trade balances will induce currency appreciation. Regrettably, despite, positive trade balances for several years, with reserves that cover over 18 months of imports, according to CBN sources, Naira has inexplicably failed to meaningfully appreciate against dollar.

The cause of this contradiction can be found in the manner our foreign exchange earnings are currently infused into the economy.   The current practice is for CBN to substitute Naira for distributable dollar revenue each month, with an exchange rate which is unilaterally determined by CBN.

naira

This practice requires the provision of a relatively huge naira cover, which keeps the mints busy while the inflationary product of this arrangement, will be ironically restrained by the compulsion for CBN to borrow back the resultant Naira surplus through the sale of treasury bills with aggressive and distortional interest rates of up to 17%; surprisingly thereafter, rations of dollars retained by CBN after Naira substitution would be auctioned in a money market which is undeniably, embarrassingly overwhelmed with surplus Naira, which will fuel inflation.

The inability of industries to thrive with CBN’s deliberate inducement of interest rates as high as 25%, the related high rate of unemployment, and inordinately high Commercial Bank profits, even when the real sector is embattled, are all traceable to this odious payments model.

The scourge of multiple exchange rates is also a fallout of the inability of the current system to produce a workable single naira exchange rate.   Alarmingly, Nigerian economy presently features at least five different exchange rates.   Let us take a look at some of these.

THE FIVE RATES OF THE NAIRA 

  • The rate at which CBN converts the monthly distributable dollar revenue into naira before sharing to constitutional beneficiaries maybe described as the Revenue Rate;  this rate has hovered between N100-110=$ since 2001.
  • The special rates for oil marketers’ fuel imports: this rate became unavoidable after the upward surge in demand of fuel importers for foreign exchange after deregulation to keep prices stable.  There is no official confirmation of this rate but it may not have remained at N123=$ as before.
  • The N132.80=$ DAS rate is generally regarded as the official rate,  and is determined at  weekly auctions   in which CBN, would, as in a monopoly, provide all the dollar supply; however, by depositing huge cash surpluses of government agencies in commercial banks, CBN inadvertently, also partly funds commercial   banks’ purchase of dollars auctioned.   Evidently, there is no semblance of a free market with multiple sellers of dollars in DAS auctions.   What we have is CBN’s monopoly of dollar and Naira supply.

Regrettably therefore, Naira rate has unexpectedly primarily remained impervious to increasing dollar supply.   For example, dollar lost 25% against most international currencies last year, yet, despite Nigeria’s consistent trade surpluses with increasing reserves, naira inexplicably remained resistant to dollar at N132.8=$ for about eight months.   This rate becomes a depreciation of over 20% when compounded with dollar depreciation against Euro and Sterling.

  • The export proceeds rate is the rate at which banks sell forex inflow from private sectors exporters and foreign direct investors outside CBN sources.  The applicable rate is usually some percentage points higher than the official DAS rate.  There are suggestions, however, that most of the funds traded as export proceeds are actually roundtripped foreign exchange from the official DAS.
  •   Incidentally, CBN has also publicly decried the indulgence of several banks in large-scale round tripping; surprisingly however, so far, only one or two banks have been given slap on the wrist sanctions for this fraud!   Critics have also suggested that the huge gains from round tripping may be partly responsible for the rapid expansion and apparent profitability in the banking sector, despite the continuous contraction of the real sector, whose fortunes under normal circumstances, should move in unison with that of banks!

 

  • The interbank rate is adopted for forex transactions between fellow banks.  The forex supply to this market is derived from the so called export proceeds market referred to above.

In the preceding narrative, we have identified five different exchange rates already, but we cannot complete this piece without mention of the ubiquitous black market rate, which has been described as the tail that wags the dog!   The black market, by its nature, is normally relatively shallow as can be observed in the frenzy of operators to consolidate exchanges above $1000 at any of the ‘joints’ in Martins Street or Allen Avenue in Lagos.

 

So why should such a presumed small market that primarily serves, the forex needs of travellers surprisingly control the official DAS rate. Generally, the gap between the black market rate and DAS hovered between 4-15% since 2001, and the current rate is N140=$.   The CBN’s traditional equalization strategy is to attempt to close the gap between the black market by raising the official rate, but soon after such adjustment, the black market rate would once more outstrip the DAS rate and this will once again be followed by further adjustment in an  endless cycle of Naira devaluation.

The net consequence of having a multiplicity of exchange rates against the naira is an incoherent and obtuse foreign exchange market.   The leakages which are made possible by the system translate into a virus in the economy where the absence of a level playing ground creates distortions to a free market system with adverse consequences for efficient resource allocation.   The system encourages indolent rent seekers and also disturbs the ‘work and reward ethic’ as huge sums can be made without any real direct contribution.

A country with a multiplicity of exchange rates will have a rudderless monetary framework; besides its currency would remain weak, even if external reserves continuously increase! It is clearly recipe for economic backwardness!”

The above article was first published in Vanguard Newspaper in January 2005. Regrettably the predicament of widely divergent multiple exchange rates still prevails in 2017.

 

THE NAIRA SAVE, SAVE NIGERIA!

 

 

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