BEVERLY HILLS, May 10, (THEWILL) – The persistent scarcity of foreign exchange in the country is largely responsible for the multiple exchange windows, an anomaly that is impacting severely on the economy. The foreign exchange channels include the official, investors and exporters, bureau de change and the parallel (black) market windows.
The turbulent effect of the gap between the official and non-official exchange rates for the naira against the United States’ dollar goes beyond direct impact on individuals and groups. It also sucks vitality out of the economy. This is because it does not guarantee adequate productivity nor creates the values required to boost the economy.
The World Bank and the International Monetary Fund count multiple exchange rates among the Achilles’ heels of the Nigerian economy as it promotes the false value of the local currency – the naira. It also encourages arbitrage and other forms of currency abuse in the financial space.
Thus, the fight against multiple exchange rates is not only for the benefit of investors, but also every economic player, including policy makers and the man on the street.
Over the years, the naira exchange rate has oscillated around monetary policy rates and other guidelines aimed at “rationing” the scarce dollar and hedging the local currency from a free fall. The naira’s official rate, which is largely controlled by the Central Bank of Nigeria, has been hovering around N379 per US$1 after it was devalued for the second time in June 2020. The scarcity of forex, which triggered the adoption of multiple exchange rates, has been a source of challenge to investors and those who depend on imported raw materials.
Stakeholders have blamed the CBN for the hiccup in the forex market as the apex bank adopted dovish methods in the formulation of its monetary policies. Its tightening approach aimed at curtailing inflation and ensuring a stable exchange rate has not yielded the expected comfort for players.
The Governor of the CBN , Godwin Emefiele, has pointed accusing fingers at the BDC operators whose nefarious activities have worked against efforts to achieve forex stability and attain single-window forex market. Emefiele said the activities of some BDC operators, combined with the unpatriotic moves of their likes in the parallel market, have worked against the integrity of the forex market.
He maintained that the parallel market is a tainted platform patronised by people who desire to deal in illegal foreign exchange transactions, including the sourcing of FX cash for the purposes of offering bribes and other corrupt dealings.
The banking regulator boss also noted that the parallel market is not more than five per cent of the forex market, yet it goes a long way in distorting the forex market.
Emefiele, who disclosed this during a virtual briefing in Abuja after the November 2020 Monetary Policy Committee meeting said that Nigeria’s official exchange rate should not be determined by the rate in that market where the naira has weakened to a three-month low.
The CBN governor who expressed his disappointment at the rhetoric of some analysts said the parallel market rate of N480/$1 had come to be accepted as the true exchange rate.
Emefiele said: “Indeed, I heard some analysts talking about the parallel market, saying that the exchange rate is at N480. I want to say that it is unfortunate and really unfair that even analysts, who are supposed to know better, will play with numbers and begin to determine the exchange rate of our currency by using a parallel market rate.
“For the information of everybody, the parallel market, as far as we know it and according to the data that we have, is a shallow market in Nigeria with no more than 5 percent of the market share.
“The parallel market, and quote me, is a tainted market in Nigeria where people who desire to deal in illegal foreign exchange transactions, including sourcing of FX cash for purposes of offering bribes, corruption, like to go.
“And that is where people who are supposed to understand the implication of these economic activities on our country begin to go to television and begin to say our exchange rate is N480. This is very unfortunate.”
Many stakeholders claim that the CBN shares most of the blame in the exchange rates disparity due to some of its policies. For example, there are restrictions on third party transfer of forex from one account to another while importers have limited room to source forex.
Forex illiquidity in the official market also means most businesses have no option but to source forex in the parallel market where it costs more. Not doing so means they will not meet their obligations, such as servicing loans in forex, paying suppliers and honouring contracts.
Meanwhile, the IMF last April pointed out that unifying the exchange rate would impact the economy more positively than the multiple exchange rates regime, which creates room for arbitrage.
The IMF disclosed this when it approved the sum of $3.4 billion as emergency financial support for Nigeria.
The financial support, which is under its Rapid Financing Instrument programme, was to help mitigate the impact of the COVID-19 pandemic on Nigeria’s economy.
The IMF Deputy Managing Director/Acting Chair, Mitsuhiro Furusawa, expressed special interest in getting Nigeria to follow through with the unification of the multiple exchange rates.
In his words, the IMF Chief said: “Steps taken towards a more unified and flexible exchange rate are also important and unification of the exchange rate should be expedited.’’
While approving the $3.4 billion loan for Nigeria, the IMF was still pressuring Nigeria to fast-track the unification of various exchange rates that are currently applicable in Nigeria.
The global lender has been very consistent with its opposition to the usage of multiple exchange rates because it believes that it creates a lot of distortion in prices, hurts businesses and encourages corruption as it is susceptible to manipulation.
The international oganisation also noted that a unified exchange rate would encourage transparency and help attract more Foreign Direct Investment. There is no doubt, however, that the single exchange rate has been identified as an effective tool for resource allocation.
Part of the genesis of the country’s dollar scarcity is linked to the crunch in crude oil production, caused by violent attacks on facilities in the Niger Delta region, and the drop in global prices for oil on which the Federal Government depends for 90 percent of its forex earnings.
The other trial against the naira is tied to a global trade tension between the US and China which impacted the global economy in many dimensions. As the world tilts towards a global village, there is the tendency that volatility in the commodity market will have spiraling effects across the world, especially in the case of inter-linked economies.
The solution to Nigeria’s forex crisis hinges on boosting production and stimulating the economy towards increased non-oil revenue. The decrepit state of infrastructure across the country, especially in the areas of power and road network, must be addressed to boost productivity.
This will position the over 17 million micro, small and medium enterprises for optimum product and service delivery. Agriculture and agro-allied businesses should be supported to maximally create avenues for foreign exchange earnings. This will also curb the country’s high rate of unemployment.
The CBN has announced indefinite extension of the ‘Naira for Dollar’ promo aimed at encouraging dollar inflow from Nigerians in Diaspora. It is doubtful if this will achieve the desired objective as long as the disparity between official and non-official exchange rates linger.
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