Last month, the Central Bank of Nigeria (CBN) rolled out a new foreign exchange market policy, which excluded finished products, information technology, telecommunication equipment, imported electricity generating sets and invisible trades from the purchase of foreign exchange in the Retail Dutch Auction System (RDAS) window.
The country’s apex bank officials explained that the measure was being introduced to maintain the existing stability in the foreign exchange market and further strengthen the various policy measures already initiated by the CBN. The CBN authorities also explained that the exclusion of these items was as a result of the declining price of crude oil in the international market coupled with the fact that the country’s foreign reserve was under pressure as it continued to decline.
During his inaugural speech, the Governor of CBN, Mr Godwin Emefiele, had assured Nigerians that the country’s regulatory bank would ensure that the economy and indeed the naira were protected from the vagaries of the oil market. Current development obviously suggests that Emefiele may have already failed in that promise.
With the new forex policy in place, a huge demand for foreign exchange from the official market would now be transferred to inter-bank transactions. Invariably, the sector that would benefit from this fall out is the bank. Indeed, what is going to happen now is a return to the multiple exchange rates, which the country had condemned some 15 to 20 years ago.
Currently, the country has about three or four exchange rates of the naira. Now the official CBN rate of N168 to $1 exists alongside interbank rate of N176 to a dollar and a Bureau de Change rate of over N183 to $1. Moreover, what special rates would funding for specific government imports or those applicable for pilgrims to Mecca and Jerusalem attract?
In any case, it does not make any sense for religious bodies to access dollars for pilgrimage at subsidised rate while the real sector may have to pay well over 10% for funding their forex requirements. And when this happens, general goods and ultimately food prices would go up.
We believe that the policy has a real danger of unleashing inflation in the country. If inflation is already uncomfortable at eight percent, it is going to add to the challenges of keeping inflation below the single digit.
Central Bank had maintained that the downturn in the crude oil price is affecting the strength of the naira. We think this is a bit doubtful. Perhaps, there is need to ask why the naira was not strong when the country reportedly had excess reserves. If the rate of naira did not improve when the country had more foreign reserves, perhaps it is not fair to blame the dip in reserve as a reason for the pressure on the naira. Indeed, what the CBN has done, as regards the current development, is a clear-cut devaluation of the naira in order to maintain price stability. Whereas we know that naira pressure is the result of people losing faith in the purchasing power of the naira.
It is instructive to note that the price of naira is primarily governed by the quantum of naira in circulation or available for spending. And it is that quantum of naira which is available for spending that affects the inflation. This is because the more money available in the system chasing few goods, the country is bound to have price increase in commodities. Therefore, until the issue of excess liquidity in the system is tackled, we believe that the CBN’s mandate of achieving price stability and a stronger naira would definitely be almost impossible.
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