Any patron of Bureau de Change may find that a difference of about N10 per dollar now exists between the official rate of N155 per dollar ex-Central Bank, and about N165/dollar in the open market!  This is in place of the permitted 1% markup officially allowed to commercial banks on dollar purchases ex-CBN. 

According to the CBN, commercial banks have taken advantage of the wider gap in forex rates to roundtrip dollars earlier purchased from CBN's forex auctions with large-scale dollar importation, for onward sale to Bureaux De Change (BDCs) and customers!!  
Surprisingly, despite serious implications of such odious practice on the economy, no bank has so far suffered any serious sanction!  

In an attempt to puncture the bloated demand for dollars, CBN, last week, rolled out a series of measures, which included withdrawal of the operating licences of about 20 BDCs for purchasing and selling huge sums of dollars, without appropriate documentation, against CBN guidelines; furthermore, commercial banks will henceforth only be allowed to import foreign cash after prior CBN consideration and approval.

Paradoxically, in order to curb dollar demand, CBN also raised the existing limit of US$40,000 to US$150,000 per annum for holders of naira debit and credit cards!  Question is, how many Nigerians earn this kind of money, and how much tax do they pay?  Nonetheless, CBN's latest requirement that recipients of foreign exchange money transfers (i.e. ex-Western Union, etc) shall henceforth be paid in naira, may actually, drive the bulk of such remittances back into the 'black market', which offers better exchange rates!  
Similarly, CBN's reduction of BDCs' maximum weekly purchase from $1,000,000 to "mere" $250,000, in spite of rising demand, might actually further reduce dollar supply and instigate naira exchange rate well above N165=$1.  Curiously, however, in August 2011, CBN management had approved the removal of the limit of $1m/week sales to BDCs as part of the measures to "sustain and ensure exchange rate stability"!  Ironically, conversely, the slap-on-the-wrist penalty for those apprehended for smuggling millions of foreign currencies from Nigeria remains the simple forfeiture of 10% of the foreign exchange value to government! 

In addition to the latest measures, CBN has also abolished the Wholesale Dutch Auction System (WDAS), under which banks could speculate, buy and hoard foreign exchange purchased from CBN, for onward sales to customers and importers; consequently, the Retail Dutch Auction System (RDAS) has been reintroduced, so that banks would now only purchase foreign exchange as per the specific demand of their customers.  Incidentally, the failure of this same reinstated RDAS, in the past, led to its substitution with WDAS, which is now again being replaced by the earlier discarded RDAS.  See our article titled "WDAS: Why is CBN Fooling Nigerians?" published in 2006, at http://www.lesleba.com/wdas.doc.

It is noteworthy that several forex market systems, such as FEM, IFEM or AFEM, DAS, were also adopted in the past, but regrettably, just like RDAS and WDAS, they all failed to forestall extensive dollar hoarding and round-tripping!  Consequently, this latest reintroduction of RDAS is retrogressive and akin to a dog returning to its vomit!  

In reality, the forex market structures failed because CBN consciously ignored the other side of the equation relating to the supply of naira, because, as earlier indicated, when increasing cash sums chase any commodity whose supply is sticky, the price of that commodity will invariably rise.  In other words, whenever naira supply increases relative to available dollars, we can expect that the price of dollars will rise with increased patronage!!  

So, any realistic and sustainable solution to the consequences of a beleaguered naira must recognize the origin of unceasing excess naira or excess liquidity in the market!  Every month, against the grain of wisdom, CBN religiously, borrows about N300bn excess cash from the money market at oppressive interest rates in order to reduce perceived excess naira from our money market!! 

Sadly, despite CBN Governor's belated "confession" of "inadvertently" sustaining the practice of borrowing back government funds in such transactions, Nigerians are not bothered by the reality that such humongous public debts are ultimately not applied to infrastructural enhancement or improvement in social welfare of Nigerians.

Although the CBN and its surrogate parastatals such as Asset Management Corporation of Nigeria and Debt Management Office would swear that the perceived excessive spending of the three tiers of government is responsible for the unending excess cash in the system, the truth, of course, remains clear, that the unending scourge of systemic excess naira is the result of the ability of commercial banks to leverage multiple folds on the fresh inflow of hundreds of billions of naira, which CBN substitutes for federation dollar revenue in monthly allocations to the three tiers of government!!  Surely, the CBN cannot sincerely contest this reality!  

Conversely, if dollar revenue allocations are paid with dollar certificates, we will immediately find that the destabilising problem of useless and excess naira in the system and accumulation of avoidable public debts will become a thing of the past, as the curse of systemic naira flush with minimal improvement to societal welfare will disappear from our monetary predicament!  The artificial lopsided equation between naira and dollar supply will begin to be redressed in favour of the local currency!  A stronger naira will shift market preference from the dollar and reduce the propensity for round tripping!

Furthermore, it is paradoxical that naira rate of exchange comes under pressure simultaneously with increasing CBN dollar reserves; in other words, while the CBN decries the excessive demand for dollars, and the higher propensity for Nigerians to hoard dollars, the real villain in the price mechanism that weakens the naira is actually the CBN, as it jealously hoards and presides over $40bn, after suffocating the money market with unbridled naira creations substituted as monthly allocations for distributable dollar revenue!  

So, in effect, it is CBN's obnoxious monetary policy framework that repels market affinity/loyalty to the naira, and therefore, promotes dollarisation of the economy with large-scale forex round tripping!