President Tinubu on multiple forex rates

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I am very glad that President Bola Tibunu in his inaugural speech spoke about unified foreign exchange (FX) thus: “Monetary policy needs thorough housecleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy”.

Arbitrage is a market activity in which a commodity or currency or other tradable item is bought in one market and sold simultaneously in another in order to profit from price differences between the markets. On the one hand, multiple FX rates mean more than one FX rate for all transactions. A unified FX rate means only one FX rate for all transactions.

Ours is more like a dual FX rate regime with both fixed and floating rates. A fixed or pegged FX rate is entirely determined by the government of the currency in question. A floating FX rate refers to a currency where the price is determined by supply and demand factors relative to other currencies.

The main argument for fixing or pegging official FX rate is to safeguard the value of the naira in order to ensure price stability (low inflation rate) which is a core mandate of the Central Bank of Nigeria (CBN). It is apt to mention that some people erroneously think that the value of naira or any other country’s currency is kept strong against other currencies by an executive fiat.

The truth of the matter is that the value of every country’s currency is not what the country desires, but it is a direct function of its productive capacity. Every country’s balance of payment determines the strength or weakness of its currency. In simple terms, balance of payment is the difference between import and export values.

The current official selling price of our FX rate is N447.13 to 1$ while the parallel market rate is N743 to 1$. From the said rates one could note a difference of about N296.13 per dollar to one naira. The truth of matter is that this system of dual FX regime gives a lot of room for arbitrage. There is a widespread allegation which states that it is only very few privilege Nigerians very close to the people in power who are not even businessmen or importers that have access to the official FX. It is further alleged that these privilege few often make billions for doing nothing or adding any value. It is alleged that all they do is to get the FX at an official rate and sell it to a Bureau De Change agent at the parallel market rate and make their billions quietly.

Nigeria has gone through a very tough time with the price of crude oil falling, which had an immediate effect in terms of foreign currency inflows into the country because sells of crude oil is the biggest source of FX inflows. Our crisis began when crude oil price at the international market collapsed from as high as $115 per barrel in June, 2014 to as low as $27 in January, 2016, about $88 per barrel was lost from the inflows (that is supply for dollars) while the demand for FX remains very high. The official FX rate before then was N197 to 1$ while the parallel market rate was above N300 to 1$ per barrel.

It is sad to note that almost 90% of what we need for our daily survival is imported which explains our high demand for FX. FX is basically earned through foreign exchange of commodities and services. The CBN does not print or produce dollars only America does. The CBN only earns FX through foreign trade of our commodities and services, but unfortunately in our own case almost about 90% of our main source of FX inflows is from crude oil sales.

We have for decades wasted our hard earned FX depleting our foreign reserves with little or nothing to show for it. Serious nations use it for the procurement of war and medical equipment in case of emergencies. Serious nations also use it for the importation of raw materials for local production not the importation of finished goods that could even be produced locally with comparative advantage.

We allocate official forex to the rich for school fees , medicals and mortgage abroad when we have thousands of schools and hundreds of universities; hospitals at home, etc. Those who can afford foreign education or medicals or mortgage should go on but allocating official FX to them is sadly a subsidy for the rich. Everyone knows the CBN does not have the capacity to meet up with even the genuine daily FX request in the economy. Fixed FX regime only gives a lot of room for arbitrage in the system.

Implementing a unified FX rate now will likely mean adopting the parallel market rate. In my thought, the parallel market rate is the real FX rate because of the question of demand and supply for FX. In an import dependent economy like ours the demand and supply for FX determines the real strength or weakness of our currency. In other words, the value of the naira or any other country’s currency is determined by the country’s productive capacity.

A unified FX regime will definitely stop arbitrage, increase allocations to the three tiers of government, and determined the real value of the Naira against other currencies.

God bless Nigeria!

Dauda writes from Kaduna state via [email protected]