W-DAS: WHY IS CBN FOOLING NIGERIANS? 27022006

Nigeria’s monetary authorities have fumbled with one system or the other for determining an appropriate value for the naira against major international currencies, particularly the dollar, for almost three decades.  The various exchange rate mechanisms whether christened FEM, IFEM, or AFEM, DAS, or any other fancy acronym could never claim to be truly market determined and they have all without exception, eventually led to the depreciation of the naira, even sometimes (as at now) inspite of huge idle and increasing reserves.  The parallel market has also continued to thrive successfully and its multiple rates have been euphemistically defined as inter bank export proceeds, and black market rates, which are often inevitably below the official CBN commercial auction rate for foreign currencies by over ten percent!

The margin of up to N20 for each dollar sourced from the official auction and sold in the parallel market fuelled the success of the antecedents of the current 25 mega banks.  Indeed, the CBN had on various occasions accused the commercial banks of round tripping but regrettably, CBN sanctions on erring banks have not been as hurtful as its bark!  Nonetheless, the implication of a weakening naira is best highlighted against the history of deepening poverty in Nigeria, which has followed the path of the devaluation of the naira from stronger than parity in 1980 to its current rate of N128=$1.

The CBN, as part of its ongoing economic reforms, announced last Monday that a new “Wholesale Dutch Auction System (WDAS) would henceforth replace what it described as the erstwhile retail DAS in which banks purchased foreign exchange on account of customers’ expressed requirements at the CBN’s bi-weekly auction of the foreign exchange  component of the federal budget.  There is implied in this framework, a silent consent from the three tiers of government for the CBN to first auction their share of foreign exchange revenue for naira before paying the naira sum in the federation account for eventual sharing!  It is rather intriguing that the three tiers of government, inspite of apparent inadequate funding, appear quite happy with this arrangement even though the dollar component of the distributable budget revenue is translated into naira at less than N110/$1 before sharing, while the CBN turns round and sells the same dollar at N128=$1 at DAS (the margin between the two rates may have been as high as N30/$ for the earlier part of 2005!)

The appropriate question at this juncture is whether or not, in view of the defects of the old system, the newly introduced WDAS will serve as a better mechanism for exchange rate determination and support economic and industrial advancement in Nigeria?  Well, to start with, any euphoria that the WDAS will take our economy to the Promised Land may become dampened by the revelation of the inspiration for the new system.  

The CBN Deputy Governor for Economic Policy, Dr. Obadiah Mailafia in a press briefing, last Monday explained 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 receiving advice from a well-wisher who agrees you are poor and yet insists on taking away the very money you need to keep yourself alive!  Indeed, the Paris Club debt deal has been criticized by well-meaning international icons including no less a Nobel Laureate as being obscene and morally wrong.  Indeed, progressive Britons have advised Tony Blair to return the UK’s share of the ‘loot’ siphoned from Nigeria, as the value was more than what the UK has given as aid to the whole of Africa in over ten years!

The billionaire CEO of the International Fortunes Magazine cautioned Nigerians in a recent lecture in Lagos, that IMF-induced development policies have never had the desired impact in developing countries and advised the adoption of creative local strategies.  Our CBN Governor’s assertion on that occasion that Nigeria’s economic reform programme NEEDS was indeed homegrown may have been debunked by his Deputy, Dr. Obadiah Mailafia in last weeks press briefing!

Anyway, suspicion and speculation apart, what is different about the new system that would, according to the CBN, “promote efficiency of the forex market and the economy as a whole”?  Technically, nothing much has changed!  The main difference is that where in the past, banks’ bids at auctions were dependent on the aggregation of all their customers’ expressed forex requirements, in the new WDAS, banks bids will be determined by what volume of forex each bank believes it can sell. Presumably in the new system, this would mean that a bank may buy more forex than it actually requires for speculative considerations.   The net result of this would be to increase the demand for forex and push the naira value downwards!

The banks and lately Central Bank are each allowed 1% surcharge for every dollar sold officially to the end user under the erstwhile retail DAS.  It is not clear if this surcharge rate will prevail in the WDAS, but if liberalization of the forex market is the policy of choice, then the rate of surcharge will become footloose and move upwards, raising the cost of forex to end users.  Any hope that the banks’ rate of commission will fall is not borne out by current trends in the banking sector; in any event, a cartel rape of the customer is probably facilitated by the banking consolidation and multiple exchange rates will prevail in the market.

In recognition of the fact that the freer access to forex might induce round tripping by banks and destabilize the economy, the CBN Deputy Governor pointed out “the CBN could monitor all transactions real time online and calculate the net open positions of all banks dealing in forex, on the world standard Reuters electronic trading platform, so that they do not exceed their limits”

Impressive stuff! But we all know that the results will be as impressive as the people who operate the system.  It was not as a result of lack of monitoring or control framework that led to massive frauds in the banking system, so much so that a single bank could overdraw its limits with CBN by over N40bn in the recent past without anyone noticing or raising an eyebrow!

In a tacit admission that the old DAS like other systems before it was a product of administrative fiat (as constantly maintained in this column) the CBN Deputy Governor assured Nigerians that the new system “will facilitate a market determined exchange rate, because an exchange rate determined by public policy is not in the interest of consumers”; once again, good talk, but wait a minute, how can 24 banks buying foreign exchange from one major supplier i.e. the CBN who controls 90% of the available foreign exchange lead to a market rate that is determined by demand and supply, especially when the main seller of foreign exchange in the market doubles as the official custodian of naira supply?  CBN, I beg, please try again!! It would be national deceit to claim that by consolidating and facilitating the sale of forex to the 24 banks for onward sale to their customers, the foreign exchange market has 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 budget revenue, and it is only when these stakeholders can trade their own share of the dollars via the instrument of dollar certificates in a free market that we can truly have a liberalized market and only then will all the contradictions and anomalies in the Nigerian economy be successfully resolved as the destabilizing ghost of excess liquidity will finally be exorcised.