The CBN recently restricted direct sales of its official dollar reserves to some sectors of the economy; consequently, the importation of electronics, information technology, generators, and telecom equipment, finished products and invisible transactions will henceforth be funded with higher priced dollars from the Interbank foreign Exchange market. The CBN’s apparent objective is to reduce the demand pressure on the Naira/dollar exchange rate, and thereby restrain the rate of depletion of the Apex Bank’s self styled ‘own reserves’, which currently hover around $38bn.

Indeed, Nigeria’s monetary authorities have consistently fumbled with one system or the other for determining an appropriate exchange value for the naira against major international currencies, particularly the dollar. The various exchange rate mechanisms, whether branded as FEM, IFEM, AFEM, DAS, RDAS, WDAS or with any other fancy acronym can never claim to be truly market determined and they have all without exception, eventually led to Naira depreciation, often times ironically, inspite of huge idle and rapidly increasing reserves! 

The CBN’s November 2014 measures will similarly fail to produce an appropriately priced, market determined  and people friendly exchange rate; clearly, the current retail Dutch Auction system (RDAS) which was resurrected in October 2013 to replace the repeatedly failed wholesale DAS (WDAS) is actually a product of administrative fiat; for example, inspite of fortuitous bountiful CBN  reserves and the credible accrued surpluses in, the constitutionally unresolved, excess crude dollar account, the Naira official rate of exchange inexplicably remained static (regulated stability) at N155 for about 5 years, despite the favourably extended Forex cover for imports.

Indeed, when wholesale DAS was first introduced in 2006, the incumbent CBN Deputy Governor for Economic Policy, Dr. Obadiah Mailafia explained at a press briefing 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 the doubtful utility of any advice from a self proclaimed ‘well-wisher’, who unexpectedly insists on taking away the very funds you needed to remain alive!  Indeed, the Paris Club debt deal was criticized by well-meaning international icons including no less a Nobel Laureate as being obscene and morally wrong; progressive Britons similarly advised Tony Blair to return the UK’s share of the ‘loot’ siphoned from Nigeria, as the value was more than what the UK had given as aid to the whole of Africa in over ten years!

Instructively also, the billionaire CEO of “International Fortunes Magazine”, had cautioned Nigerians in a 2006 lecture in Lagos, that IMF-induced development policies have never had the desired impact in developing countries and therefore advised the adoption of creative local strategies.  Chukwuma Soludo, the incumbent CBN Governor’s assertion on that occasion that Nigeria’s economic reform programme ‘NEEDS’ was indeed home-grown was unexpectedly debunked by his Deputy, Dr. Obadiah Mailafia in his own press briefing in February 2006.

Nonetheless, according to Dr. Mailafia, the new WDAS system would promote efficiency in the forex market and the economy as a whole; Dr. Mailafia also assured Nigerians that the wholesale DAS in contrast to the failed Retail DAS that it replaced, in 2006 “will facilitate a market determined exchange rate, because an exchange rate determined by public policy is not in the interest of consumers”; this is certainly good talk, but wait a minute, how can several banks buying foreign exchange from one major supplier i.e. the CBN which controls 90% of the available foreign exchange supply lead to a free  market rate that is determined by demand and supply, especially when the main seller of foreign exchange in the market also doubles as the official custodian and only producer of naira supply?
“It is patently deceitful to claim that by consolidating and facilitating the sale of forex to banks for onward sale to their customers through WDAS, the foreign exchange market would 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 dollar revenue, and it is only when these stakeholders can independently trade their own share of the dollars via the instrument of dollar certificates in a free market against existing Naira values that we can evolve a truly liberalized forex market, and only then will the critical contradictions and anomalies in the Nigerian economy be successfully resolved as the ‘eternally’ destabilizing ghost of excess liquidity, will finally be exorcised.” 

The apparent failure of various forex market systems so far, is probably best amplified by the abiding contradiction of Naira depreciation, despite extended imports cover; thus, inspite of our relative ‘debt free’ status and bountiful dollar reserves which could provide over 20 months import cover after debt exit in 2006, the Naira inexplicably depreciated to N120, well below the N80=$1 which was made possible with just $4bn reserves with 4 months imports cover from 1994-1998.

Clearly, IMF endorsed forex strategies have never succeeded in eliminating the challenges of the economic distortions caused by multiple exchange rates and constant surplus Naira supply; for example, the current official CBN rate of N155=$1 exists side by side with an interbank rate of over N160=$1, and a Bureau De Change rate of over N170=$1; it is not clear what special rates apply for funding specific government imports, or indeed those rates which are currently applicable as travel allowances for pilgrims to Mecca and Jerusalem. In any event, it is incongruous, that dollar demands of faith of pilgrims’ should be subsidised while real sector and mass consumer imports which include vital operational equipment for industrial and commercial consolidation may require well over 10% more to fund the related forex requirements. 
Ultimately, as in the past, the gaps between official and open market rates of exchange may exceed N30/$1; this would undoubtedly stimulate foreign exchange malpractices (aka arrangee) and also institutionalise ‘liberalized’ round tripping in active partnership with commercial banks.

Regrettably, the new CBN measures seek to control and reduce dollar demand by restricting access to cheaper dollars to critical sectors of the economy. However, the net impact of this strategy, would be to spur higher prices that may push the already oppressive annual inflation rate beyond 10%; additionally, the restriction of dollar sales in a Naira surfeit economy will similarly push the Naira exchange rate towards N200=$1 with a collateral increase also, in the price of fuel which may in turn drive annual fuel subsidy payments above N2tn (over $12bn) or well over 40% of our annual revenue projections.

Ultimately, unless we tackle the exchange rate challenge from the Naira supply side of the equation by critically reducing the oppressive ‘eternal’ burden of excess liquidity by the adoption of dollar certificates for the payment of allocations of dollar derived federal revenue, undoubtedly, further Naira depreciation will rapidly drive inflation, constrict demand and deepen poverty nationwide.