Between CBN and its foreign exchange interventions

by Shafiu Ibrahim Abdullah

Of the many forces that determine the fortune of a particular economy, foreign exchange is of the few that can be categorized as having almighty significant, hence it classification under macroeconomic goals of any economy. Exchange rate, the price at which a country’s currency is exchange for that of others, is such a lofty goal that a government can lost its legitimacy because of it; diplomatic uproar can result from it determination, and in some instances the past, nation had gone to war. That is why when a big nation like Nigeria has some questions to answer with regard to her foreign exchange policy a serious government will listen carefully. If this question is to be asked what is the major borne of contention in diplomatic relation between the United States and China in the last one decade, with no rise of an eye brow the answer is what should the price of China currency be in relation to that of it trading partners? Even though Naira is not that significant as international currency, its determination should (at least) be of concern to people that are residing within Nigeria and few others that have something to do with the country.

Some few weeks back there was an uproar when the World Bank recommend to the Nigerian authorities to reconsider further devaluing the Naira, because at it present rate it was not sustainable, many Nigerians condemn the world Bank and upheld Sanusi for saying that he would not devalue the Naira. But even though I was not entirely against Sanusi stand at that time, I also did not see any wrong in World Bank advising Nigeria’s CBN to consider devaluing the Naira. At that time our foreign reserve position look perilous, our main exports in weak position and our interest rate remain as unfavorable as ever it was. Sanusi’s CBN was only able to maintain the 151Naira to 1 Dollar at that time by continue depletion of our foreign exchange reserve. But the events of the past few months have justify the World Bank stand, Naira has depreciated from around 151 to a Dollar to around 153 to Dollar. Though Sanusi main defense was that devaluing the Naira will only worsen inflation, which he was trying to fight at that time; cautious depreciation of Naira (which Sanusi end up doing) was the better thing to do. In developing countries and Nigeria is not an exception, no one wants to be caught towing the line of World Bank and IMF, the two major capitalist institutions in the world, hence the Sanusi public rejection of the recommendation.

The history of Nigeria’s foreign exchange management is a record of upswing, policy somersault, and absent of clear road map to steer the Naira in the turbulent sea that happened to contain far bigger sharks and predators. Starting from the time of independence when the policy was anchored to that of United Kingdom ( the time of Nigeria’s Pound) where the currency moved up and down together with the Pound Sterling to the present when we operate a kind of manage float, we are yet to have a realistic foreign exchange regime. Most of our foreign exchange options are nothing more than ‘I hope things will return to normality’ that nations around the world put forward when they don’t have something better on their plan. As any student of Economics will admit, determination of foreign exchange is one of the most complex areas of economics, not a tea party as some of our policy makers want us to belief. It is not something that can be carried out in vacuum, without considering the consequences of that action on other areas of the economy. For example, what happens to inflation, interest rate, employment, and production as a result of towing the wrong exchange determination path?

Since the appointment of Sanusi as the CBN governor in 2009, one thing that every body agrees Sanusi has achieved is bringing some kind of stability into the banking industry. But the other two areas of his job, inflation control and determination of realistic exchange rate, the CBN governor can be said to have achieved minimal success. Despite the CBN many efforts to narrow the gap between the official exchange rate and what obtain in the parallel market the gap seem to be increasing. As any person who has attempted to purchase foreign exchange will tell you the task is very herculean, whether you are purchasing through official channel or the parallel market; is as if the market is not free market at all. Behind the door deals are still been carried out as if there is no any regulator in the market. Though Banks illicit trade in the market has been curtail by the apex bank, some other not necessarily official transactions are still going on. We are all aware of the last few years when banks forget their official duties in favor of making quick profit made possible by illicit trade in Dollars and Pounds. To me the only realistic way that all these abuses will be check is by further liberalization of the market to reflect the existing realities. Though this should be done in the most cautious manner possible, in order to avoid the repercussions of hasty liberalization of foreign exchange markets.

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