The Dollar and the Naira Exchange Rate: Searching for a stable rate
More than any other price in the economy, the exchange rate remains an important relative price that presents a number of challenges for macroeconomic stability and management in Nigeria. Thus, exchange rate management in Nigeria has evolved between Fixed (exchange control, complemented by administrative controls) and guided deregulation – in the aftermath of the implementation of Structural Adjustment Programme (SAP) in 1986. From 61 kobo to the dollar in 1980, the naira as of May 2017 is officially N305/$. We can simply conclude that the single most embarrassing evidence of the mismanagement of the Nigerian economy is the exchange rate of the Naira to the US Dollar - a crisis which watershed was the introduction of SAP in 1986.We do not seem to have got it right since then… over three decades of bungling trying to battle the emergence of speculative and ‘fraudulent’ demands for the dollar have since SAP.
Though the economic crisis emanated mainly from the real sector, much hope was placed on the CNB’s monetary policy initiatives to halt the crisis. In particular, it was thought that the appropriate forex policy held the key to resolving the crisis at least in the short term. An examination of the CBN’s exchange rate policies since SAP suggests a reactive approach rather a long term developmental approach. (Of course, there has been no long-term development policy and strategy since SAP). In recent times, as for example the period 20062008 with forex availability the policy was one of further liberalization including the introduction of wDAS.With the emergence of the financial crisis in 2008, the rDAS was introduced briefly between January and July 2009 in order to prevent speculative demand and reduce demand pressure. Thereafter, the wDAS was re-introduced in July 2009 to October 2013. The continued improvement in the supply of forex led to further liberalization including removal of restrictions on investments in NTBs & FGN Bonds irrespective of tenor, provision of guarantee on repatriation of dividends/ proceeds of investments in order to encourage FX inflow. An informed analyst/ commentator described Nigeria as literally “balling” having received a combined total of US$39bn from both the official (US$12bn) and autonomous sources (US$27bn) from July to September 2013, giving an average of US$13bn per month! During this buoyant period, too individuals at the POS abroad could expend as much as US$300,000 per transaction. Contrast this with inflows of April to June 2016 of US$4.5bn which gives a monthly average of US$1.5bn from official source and autonomous flow of US$4.5bn with an average of about US$3bn. Accordingly, the CBN reintroduced the rDAS and proceeded to exclude certain import items from access to official FX. The number increased from six in early November to 41 in late November of 2014. As the crisis intensifies, the CBN took further action by scrapping both the wDAS and the rDAS windows in February 2015. The reactive policy actions of the Bank elicit more criticisms in times of crisis than in times of plenty, even though CBN policies have remained consistent in line with the circumstance.
The CBN in my view is in a fix. Against the background of a non-diversified export base, low level of reserves and absence of fiscal buffers, a flexible exchange rate by itself has little chance of bringing about stable exchange rate. The current FX containment policy driven by increased flows of FX on the supply side and active demand management, can at its very best soothe the situation temporarily – it is surely not an enduring solution to the problems of exchange rate stability. Between the purist demand and supply solution and the CBN’s containment policy with all of its imperfections including conflict of interest, it is easy the judge that containment is a preferable short term path to stability. At least, the spread between the official and the other rates has narrowed in the last couple of weeks with possible beneficial impact on consumer prices even as we must acknowledge that there is more to achieving exchange rate stability in Nigeria beyond the short-term gains.
The structure of the banking system where about a quarter dominate the industry assets and liability, and where the industry itself is not amenable to competition precludes the use of a flexible exchange rate regime as an instrument of long term economic management. For example, the industry ensures that the cost of fund (interest rate) does not respond to either scarcity or surplus. Interest rate on savings remains repressed in the face of scarcity, while the lending rate remains elevated even in times of surplus. In effect, the perversion of incentives created by banks in the money market makes it difficult for a flexible exchange rate regime to ensure stability through inflows that respond to the economy’s savings gap to bring about some stable (equilibrium) exchange rate of the naira. It is not easy applying discretionary policies either. On the one hand, the DMBs are resistant to behaving in a manner that would enable the CBN to use them effectively for discretionary actions and on the other hand, the CBN is constrained by consideration for DMB’s liabilities (and the very real consequence of their weakness) in applying appropriate sanctions which could undermine their operational capability and lead to further AMCONIZATION of the assets of the DMBs. The unique advantage of banks in converting their failures to public liability and subsequent AMCONIZATION is not enjoyed by any other sector in the economy.
As I continue to argue, Nigeria does not stand to benefit from currency devaluation even as, since the period of SAP, the economy has been programmed for devaluation. Public sector profligacy, budget delays, continuing weakness in infrastructure, corruption, unemployment and all those other factors within the