Why Nigeria Needs Single Exchange Rate
The Manufacturers Association of Nigeria (MAN), and Lagos Chambers of Commerce and Industry (LCCI), two leading umbrella bodies of Nigeria’s embattled organized private sector have joined the Babel of voices calling on the Central Bank of Nigeria (CBN) to merge Nigeria’s debilitating multiple exchange rates into one transparent regime.
The World Bank and the International Monetary Fund (IMF) along with well-meaning Nigerians in the private sector and academia had persistently called on the apex bank to merge the rates into one to stem the spate of corruption largely responsible for the embarrassing depreciation of the naira. Ironically the apex bank had turned deaf ears to the clarion calls.
At a certain point the CBN had operated about five exchange rates of the naira. But in recent times it has grudgingly reduced it to three major ones. They are the official rates at which it doles out funds to government ministries, departments and agencies for their foreign transactions. A few privileged Nigerians with strong connections to top politicians also benefit from the largesse.
The others are the import and export window rates which is used by exporters and foreign investors, while the parallel market rate is open to everyone including the organized private sector. The parallel market rate swings between N470 and N480 to the dollar. It totters to N500 to the dollar on some frenzied days.
For the official rate, the CBN has pegged the 2021 budget exchange rate at N380 to the dollar. Even the official rate fluctuates when there is turmoil in the international oil market.
The merger of the exchange rate of the naira into one was one of the conditionalities for the IMF jumbo loan of $3.5 billion obtained last year by the federal government to shore up Nigeria’s shrinking foreign reserves which was depleted by tumbling oil prices as COVID-19 frozen demands.
However, the CBN had resisted the complete merger of exchange rates for obvious reasons. The main beneficiaries of the multiple exchange rates are powerful friends of top politicians who operate bureau de change (BDCs).
The CBN doles out $50, 000 to each of their BDCs on weekly basis at the official rate. They sell it to embattled end users at the prevailing parallel market rates and rake in a minimum of N90 per dollar.
At that rate each of the BDCs rake in something close to N5 million per week just for filing papers for the allocations. Some of the operators own 50 BDCs which amounts to N250 million profit per week.
The BDC operators would simply run out of business if the CBN operates a single exchange rate. There would be no margin between the official and parallel market rates to conjure the massive profit which makes them super humans in an impoverished society.
We believe that CBN is endangering Nigeria’s economy by defiantly operating the insidious multiple exchange rates to feather the nest of the superrich. The policy has increased the cost of imported raw materials for genuine manufacturers who have to queue at BDCs to buy forex at atrociously high exchange rates as they cannot access forex at moderate rate at the official window.
It has also inhibited the inflow of foreign investments as investors await the time when CBN would merge the rates and arrive at something close to the true purchasing power of the naira.
The few foreign investors, mostly traders and service providers, who risk to transact business with Nigeria have set their exchange rates based on their assessment of the purchasing power of the naira. Chymall, a leading network marketer, last week raised the exchange rate at which it registers Nigerians for its network marketing from N470 to N500 to the dollar.
Superlife, another network marketer of a flying supplement uses the same exchange rate to fix the price of its products. Foreign investors eying the country with direct investments cannot manipulate the exchange rates the way traders do. They simply stay away. That explains why 21 million able-bodied Nigerians are jobless. It also explains why 102 million Nigerians live below poverty line in an economy that rightly ranks number-27 in a global scale of 180 nations.
The CBN is reducing Nigeria to a Banana republic with its multiple exchange rate policy that benefits only the few well-wired operators of BDCs. The time has come when the interest of the infinitesimal minority controlling the economy must be sacrificed to safe the inconsequential, voiceless majority toiling under avoidable penury.
Exchange rate merger would send strong signals to foreign investors that Nigeria is ready for business. They would bring in dollars when the official exchange rate is dictated by the purchasing power of the naira.
That would ease the excruciating scarcity in the forex market and put the naira on the path to gradual appreciation. It would exert downward pressure on the cost of production and tame Nigeria’s surging inflation.
CBN’s demand side approach to exchange rate management has failed catastrophically. It must be replaced with a policy that would boost supply of forex and dismantle demand obstacles that only serve to fuel inflation. The answer to that is a sinlge exchange rate.
