Market News

By Henry Boyo 

By: Sir Henry Olujimi Boyo (Les Leba) first published in November 2014

Intro:

Last week, this column repub­lished ‘Can CBN Defend the Naira?’ it discussed the effects of Nigeria’s oil dependence on advancement and why the pub­lic movement towards a strike does not bring on the intended sustainable results.

Today’s republication dis­cusses the depreciating Naira rate in light of increasing Dol­lar reserves. It also references a billionaire CEO, who cautioned Nigerians against IMF develop­ment policies. The article also debunks the false belief that the Wholesale Dutch Auction System (WDAS) would facilitate a market determined exchange rate.

As you read through the below article taking note of previous events or rates, keep in mind its year of publication (2014), a clear indication that Nigeria’s econom­ic situation is yet to improve even after all this time.

The CBN recently re­stricted direct sales of its official dollar re­serves to some sectors of the economy; consequently, the importation of electronics, information technology, gener­ators, and telecom equipment, finished products and invisible transactions will henceforth be funded with higher priced dol­lars from the Interbank foreign Exchange market. The CBN’s ap­parent objective is to reduce the demand pressure on the Naira/ dollar exchange rate, and thereby restrain the rate of depletion of the Apex Bank’s self-styled ‘own reserves’, which currently hover around $38bn.

Indeed, Nigeria’s monetary authorities have consistently fumbled with one system or the other for determining an appro­priate exchange value for the naira against major internation­al currencies, particularly the dollar. The various exchange rate mechanisms, whether branded as FEM, IFEM, AFEM, DAS, RDAS, WDAS or with any other fancy ac­ronym can never claim to be truly market determined and they have all without exception, eventually led to Naira depreciation, often times ironically, in spite of huge idle and rapidly increasing re­serves!

The CBN’s November 2014 measures will similarly fail to produce an appropriately priced, market determined and people friendly exchange rate; clearly, the current retail Dutch Auction system (RDAS) which was resur­rected in October 2013 to replace the repeatedly failed wholesale DAS (WDAS) is actually a prod­uct of administrative fiat; for example, in spite of fortuitous bountiful CBN reserves and the credible accrued surpluses in, the constitutionally unresolved, excess crude dollar account, the Naira official rate of exchange in­explicably remained static (regu­lated stability) at N155 for about 5 years, despite the favourably extended Forex cover for imports.

Indeed, when wholesale DAS was first introduced in 2006, the incumbent CBN Deputy Gover­nor for Economic Policy, Dr. Oba­diah Mailafia explained at a press briefing that the “liberalization of the forex market was one of the conditions for the con­summation of the Paris Club “debt forgiveness” deal, which was also endorsed by the In­ternational Monetary Fund!” (Punch 21/02/06 pg. 2). Talk about the doubtful utility of any advice from a self-proclaimed ‘well-wish­er’, who unexpectedly insists on taking away the very funds you needed to remain alive! Indeed, the Paris Club debt deal was crit­icized by well-meaning interna­tional icons including no less a Nobel Laureate as being obscene and morally wrong; progressive Britons similarly advised Tony Blair to return the UK’s share of the ‘loot’ siphoned from Nigeria, as the value was more than what the UK had given as aid to the whole of Africa in over ten years!

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Instructively also, the billion­aire CEO of “International For­tunes Magazine”, had cautioned Nigerians in a 2006 lecture in Lagos, that IMF-induced devel­opment policies have never had the desired impact in developing countries and therefore advised the adoption of creative local strategies. Chukwuma Soludo, the incumbent CBN Governor’s assertion on that occasion that Nigeria’s economic reform pro­gramme ‘NEEDS’ was indeed home-grown was unexpectedly debunked by his Deputy, Dr. Oba­diah Mailafia in his own press briefing in February 2006.

Nonetheless, according to Dr. Mailafia, the new WDAS system would promote efficiency in the forex market and the economy as a whole; Dr. Mailafia also assured Nigerians that the wholesale DAS in contrast to the failed Re­tail DAS that it replaced, in 2006 “will facilitate a market deter­mined exchange rate, because an exchange rate determined by public policy is not in the interest of consumers”; this is certainly good talk, but wait a minute, how can several banks buying foreign exchange from one major supplier i.e. the CBN which controls 90% of the avail­able foreign exchange supply lead to a free market rate that is de­termined by demand and supply, especially when the main seller of foreign exchange in the market also doubles as the official custo­dian and only producer of naira supply?

“It is patently deceitful to claim that by consolidating and facilitating the sale of forex to banks for onward sale to their customers through WDAS, the foreign exchange market would become liberalized as claimed by the CBN. True liberalization implies having multiple sell­ers and multiple buyers; the 36 states, 774 Local governments and federal government and its agencies are the correct owners of the dollar component of the distributable dollar revenue, and it is only when these stakehold­ers can independently trade their own share of the dollars via the instrument of dollar certificates in a free market against existing Naira values that we can evolve a truly liberalized forex market, and only then will the critical contradictions and anomalies in the Nigerian economy be success­fully resolved as the ‘eternally’ destabilizing ghost of excess li­quidity, will finally be exorcised.” (see: WDAS: why is CBN fooling Nigerians, Vanguard 27/02/06) at www.Lesleba.com.

The apparent failure of vari­ous forex market systems so far, is probably best amplified by the abiding contradiction of Naira depreciation, despite extended imports cover; thus, inspite of our relative ‘debt free’ status and bountiful dollar reserves which could provide over 20 months im­port cover after debt exit in 2006, the Naira inexplicably depreciat­ed to N120, well below the N80=$1 which was made possible with just $4bn reserves with 4 months imports cover from 1994-1998.

Clearly, IMF endorsed forex strategies have never succeeded in eliminating the challenges of the economic distortions caused by multiple exchange rates and constant surplus Naira supply; for example, the current official CBN rate of N155=$1 exists side by side with an interbank rate of over N160=$1, and a Bureau De Change rate of over N170=$1; it is not clear what special rates apply for funding specific government imports, or indeed those rates which are currently applicable as travel allowances for pilgrims to Mecca and Jerusalem. In any event, it is incongruous, that dol­lar demands of faith of pilgrims should be subsidised while real sector and mass consumer im­ports which include vital oper­ational equipment for industrial and commercial consolidation may require well over 10% more to fund the related forex require­ments.

Ultimately, as in the past, the gaps between official and open market rates of exchange may ex­ceed N30/$1; this would undoubt­edly stimulate foreign exchange malpractices (aka arrangee) and also institutionalise ‘liberalized’ round tripping in active partner­ship with commercial banks.

Regrettably, the new CBN measures seek to control and re­duce dollar demand by restrict­ing access to cheaper dollars to critical sectors of the economy. However, the net impact of this strategy, would be to spur higher prices that may push the already oppressive annual inflation rate beyond 10%; additionally, the restriction of dollar sales in a Naira surfeit economy will sim­ilarly push the Naira exchange rate towards N200=$1 with a col­lateral increase also, in the price of fuel which may in turn drive annual fuel subsidy payments above N2tn (over $12bn) or well over 40% of our annual revenue projections.

Ultimately, unless we tack­le the exchange rate challenge from the Naira supply side of the equation by critically reducing the oppressive ‘eternal’ burden of excess liquidity by the adop­tion of dollar certificates for the payment of allocations of dollar derived federal revenue, undoubt­edly, further Naira depreciation will rapidly drive inflation, con­strict demand and deepen pover­ty nationwide.