CBN: ONE STEP FORWARD...MANY MORE STEPS NEEDED.
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Last week, I was surprised that many Nigerians were shocked that the US dollar exchanged for over 300 Naira. Our Senators seemed to be in greater shock than many, no wonder they have summoned the CBN Governor to appear in their chamber this week to explain why the Naira is being pummeled in the parallel market which as I said last week is the true foreign exchange market.
O-level Economics taught me that the price of every product or commodity is fixed at the point where supply intersects with demand. If supply remains constant while demand increases, price goes up and when supply dips in the presence of high demand, the price goes further up. And that's why I am surprised that any body is asking why the Naira is losing value rapidly, competing to join the league of Italian Lira, the Greek Drachma, the old Ghanaian Cedi, the Gambian Dalasi or the old Panya money. For a while now, I believe it started when Prof Chukwuma Soludo was CBN governor and intensified when Sanusi Lamido Sanusi (SLS) took over, the Bureau De Change businessmen have been high on CBN Petrodollar. It seemed a good strategy then to fund the BDCs by CBN. It quickly narrowed the difference between the official and the parallel market rates and brought stability to the value of the Naira against other major international currencies.
Infact, at a time the rates merged and because the protocols were shorter and charges cheaper, many small businessmen and travelers completely depended on the BDCs for their forex supply. For example, I have not been to the Bank in the last five years or so for my Basic Travel allowance( BTA). Why go through the rigor of filling forms and waiting on the line, when I could stop by at the Mallam's corner and buy what ever dollars that I needed without protocols and often without limit, even if it is with some small premium.As I referred to earlier on, the reign of SLS was the golden era of the BDCs and their array of foot sales men who are all over the public space soliciting for forex business. With the full deregulation of the forex trade and the regular supply of foreign currencies to all sectors of the parallel market, the Naira became a convertible currency. With it the BDCs assumed more roles including the opening of LCs and funds transfer, of any size. Then all of a sudden, the CBN cuts off the supply and people express shock that the depreciation of the Naira was rapid and unprecedented breaking a 43 year old record. The moment the supply of dollar began to fall, the value of the Naira began to depreciate and every effort to curb demand by CBN has not helped as demand seems very inelastic, given our over Dependance on importation.
I guess that it was in a sincere effort by CBN to curb the depreciation of the Naira and also stop the growing practice of Nigerians holding the dollar instead of the Naira, that it decided to interfere with the domiciliary account transactions. It asked commercial banks to stop accepting dollar deposits and also not to allow any body use the foreign currency left in the account to order or pay for any products abroad. This was a very frustrating development for domiciliary account holders. I personally could not understand how that was going to benefit the value of the Naira or any body. As it turned out, while banks could not transfer money abroad from the domiciliary accounts or other non official sources, the BDCs had their way. Domiciliary account owners then withdrew their money from their accounts which they were allowed to do and went to the BDCs who transferred such monies at a premium. So what ever objective the CBN wanted to achieve could not be realized to any significant degree. Instead the economy suffered because of this policy. Supply decreased and price continued to go high.
Common sense in a globalized economy should dictate, that if a product is in short supply, all efforts should be made to attract such product and increase its supply. If Nigeria is in short supply of dollars, as it certainly and critically is, it would have made more sense if we took steps to promote supply, rather than restrict supply. In my opinion, the domiciliary account mechanism is a potent method of bringing foreign exchange into the Country. If I were to suggest I would rather have persuaded domiciliary account owners to sell their dollars to the CBN so that they can fund other users, rather than ask them to stop paying dollars into their accounts. As has been proven times again and again,bans and restrictions in a globalized economy are often futile exercises. The recent ban on domiciliary account deposits achieved very little but caused plenty of damage.
It is therefore good that last week, the CBN lifted the ban on the deposit of foreign currencies into domiciliary accounts. To me and to many others who had hitherto criticized this policy, this is a good step in the right direction. We urge the CBN to therefore go ahead and quickly take other similar steps that will help to stabilize the Forex market and bring certainty to the value of the Naira. The next urgent step which must be taken is to allow free utilization of the money in the domiciliary account. There should be free deposit and free withdrawl, including transfer to service legitimate obligations abroad. IF that necessary next step is not urgently taken, then there may not be any incentive for any body to go and deposit more money into domiciliary accounts. As I was concluding this article, there was some indication that this may have been done.
Secondly, the CBN must address the root cause of the forex crisis. Their focus should be on how to attract more foreign exchange into the country. To do so, they must open the doors. Nothing can come in, when the doors are shut. Yes when you open the doors, certain things may go out and some will come in. The challenge is to design strategies and incentives that will attract more incoming than outgoing. There are a couple of Nigerians who can advise CBN and the Nigerian Government on how to get more dollars flow into Nigeria than go out, even in the face of the dwindled oil price .And in doing this, they must align with the Trade and Investment policies of the Ministry of Industry, Trade and Investment.
Thirdly, this labour to artificially prop up the value of the Naira in a so called official market will be hard labour that may achieve very little. We need to take a holistic view of how to manage the forex market. Rather than maintain artificial official price which does not satisfy critical needs- pay for matured obligations, import refined petroleum products and pay for imported raw materials and production machinery( according to CBN's stated priorities) , but rather provides incentive for round tripping and other corruption laden practices, we may have to just let the Naira find its level. Many 'smart dudes' in the forex business are making a kill, obtaining dollar at the official market at 197 Naira and selling at the parallel market at 305 Naira. And the gap may still widen . But If we had let the Naira find its level when the Naira was exchanging at 150 against the dollar, it may not have depreciated to over 300 at this time.
One of the stated cardinal objectives of the new administration at the federal level is to promote local production. This can not readily happen with an artificially propped up Naira. Artificial Naira pricing will continue to encourage importation. A market determined pricing of the Naira will discourage importation and force us all to look inwards. Watching the CBN governor announce the lifting of one ban and the introduction of another ban on television last week, my heart went out to him. He sounded tired and stressed. I wished I could help to reduce the stress. But I believe that the simplest way to moderate this stress is to return to the liberalization of the forex market and allow the market determine the price of the Naira. The Federal government can decide what it wants to do with its dollars while other economic agents will decide what to with theirs. Experience has shown that the market forces remain the most efficient determinant of price for every commodity- tangible and intangible. Some may disagree but there is overwhelming evidence, globally and even from our recent economic history.
Mazi Sam Ohuabunwa OFR