NAIRA weakened by 3.4 per cent at Lagos parallel markets on Wednesday afternoon, a day after the Central Bank of Nigeria (CBN) announced a ban on sale of foreign exchange to Bureau de Change (BDC) operators.
The market began with N505 to a dollar on Wednesday morning, but moved to N522/$ three to four hours later, according to Abokifx, which provides information on foreign exchange market rates.
The CBN website advertises the official dollar rate at N410.16, but access to FX at that rate it is limited. Most FX users in the country rely on BDCs or the parallel market for foreign transactions.
The demand for dollars is high in Nigeria as it is the commonest currency used in FX transactions.
“The CBN needs to give the market a chance. Its current approach would continue to deepen distortions in the economy, perpetuate round-tripping, fuel speculation, suppress forex supply and boost underground economy,” an economist and former Director-General of Lagos Chamber of Commercce and Industry Muda Yusuf told The ICIR.
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On Tuesday, the CBN Governor Godwin Emefiele halted dollar sales to BDCs in the country amid growing concerns for illicit financial transactions, dollar racketeering and other issues relating to economic sabotage.
Emefiele expressed worry that some stakeholders in the banking sub-sector were not helping the government in maintaining foreign exchange reserves through violation of some laid outlaws.
The market has reacted to the news, weakening naira, Africa’s largest economy’s currency.
Analysts have faulted the apex bank’s exchange rate regime, maintaining that it has created a huge enterprise around foreign exchange-round tripping, speculation,over-invoicing, and capital flights.
“What is happening in the foreign exchange market is a consequence of the CBN policy choice of a fixed exchange rate regime and administrative allocation of forex,” Yusuf said.
He explained that the action of the apex bank amounted to tackling the symptoms rather than dealing with the causative factors, regretting that the bank did not believe in the market mechanism.
He noted that market systems were time-tested instruments of efficient resource allocation in leading economies around the world, even though exceptions were recognised in economics and could be dealt with.
“Suppressing the market is like swimming against the tide. It is a difficult battle to win.
Moving retail forex transactions from BDCs to the banks is like kicking the can down the road. The same issues would manifest even with the banks. Managing a subsidy regime is typically a herculean task. We have seen this happen with fertiliser subsidy and petrol subsidy. The story cannot be different with foreign exchange,” he said.
He said the way out of the foreign exchange conundrum was for the CBN to allow the market to function.
Yusuf noted that the apex bank must de-emphasise demand management and focus on strategies to stimulate forex inflows. “A fixed exchange rate regime is a major disincentive to inflows and and creates enormous pressure of demand for forex. It is a contradiction in terms.”
The CBN’s focus in the last six years has been directed at managing demand for FX, rather than seeking ways of increasing supply.
At the 2020 National Economic Summit, Professor of Economics and Head of Economic Advisory Council Doyin Salami advised the CBN to focus less on demand management of the FX market and more on supply management.
Analysts are also worried that despite advice to maintain a single market, the apex bank has maintained multiple markets, thereby creating uncertainty while puncturing investor confidence.
Former Deputy Governor of the CBN Kingsley Moghalu said the apex bank must float the naira and stop subsidising imports.
“The government cannot continue to fix the price of the naira,which is what the Central Bank is doing. If you float the naira, you have to stop subsidisng imports. Our country is structured in such a way that it is subsidising the country’s imports.This breeds arbitrage.
“When you float the naira, you create incentive for those who want to export and earn forex. That way, you structurally shift the economy to those who want to export, but must combine it with trade policy,” Muoghalu said.
The Manufacturers Association of Nigeria Export Group Chairman Ede Dafinone, on his part, explained that only a strong manufacturing and export sectors would save the naira and the economy.
He said at a recent interview that encouraging exporters would enhance dollar inflows into Nigeria and save the naira.
The CBN has banned 46 items from milk to tomato from accessing dollars from the FX market. Analysts believe that the apex bank is getting it wrong by simply discouraging demand for dollars and other foreign currencies.
Founder and Managing director of Cowry Assets Management Limited Johnson Chukwu told The ICIR that he did not subscribe to the use of ‘fiat’ to discourage consumption.
“I encourage the use of trade tools. The reality is that you cannot ban the consumption of commodities that people have demand for. When you do that, you force that commodity to black market, where the people will now have to pay extra cost to keep them. You cannot legislate against human consumption,” Chukwu said.
“My approach is to say, for instance, let us use ‘trade tools’ such as higher tarrif to discourage such commodities that we do not want people to bring in. So their cost becomes more expensive. That way the government makes money and local firms are incentivised to produce more locally,” he explained.
The IMF has advised the apex bank to maintain a single FX market, but this has not happened.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.