The Minister of Finance, Kemi Adeosun, reportedly responded to a Reuters’ News Agency inquiry in December 2016, that, “the Central Bank of Nigeria is working on the elimination of arbitrage” in the foreign exchange market. The spokesperson for the apex bank, Isaac Okorafor, also confirmed in a press statement (see The PUNCH, December 21, 2016), that the CBN was working towards “ensuring there is no black market”.

Vice President Yemi Osibanjo, also, while speaking at the World Economic Forum in Switzerland, in January 2017, observed that “the CBN needs to close the gap between the official (N305=$1) and black market (N495=$1) exchange rates very soon” (see The PUNCH, January 18, 2017).

Furthermore, the Deputy Senate President, Ike Ekweremadu, was later reported in The PUNCH edition of January 19, 2017 to have also expressed concern “with the huge gap between the parallel and the official market” rates and therefore agreed with the Chairman of the Senate Appropriations Committee, that “the Central Bank of Nigeria needs to do something about it, because it is one thing that is breeding corruption.” Ekweremadu consequently insisted that “we must find a way of bridging that gap and also stabilise the exchange rate, so that investors can do their own forecast in terms of their investments.”

In retrospect, in September 2005 when the CBN appeared equally alarmed at the N17/$ prevailing difference between official and open market rates, the apex bank attempted to harmonise the divergent rates by increasing dollar sales to all and sundry, including financially reckless weekly allocations of up to $500,000 each to over 1,000 BDCs nationwide. This approach to rate harmonisation was described as akin to smashing a cockroach on a glass table with a sledge hammer in an article titled, “Cheaper black market dollar” in July 2006! (see http://www.lesleba.com)

Regrettably, with almost N200 per dollar presently between official and parallel market rates, the divergence has now metamorphosed into a monster. Much more alarming, however, is that additional dollar supply to the parallel market is the same earlier failed strategy adopted to resolve the widening exchange rate disparity.

The above title, ‘Widening gap between official & black market exchange rates’, was first published in the Vanguard newspaper in September 2005 and the following is a summary of that article. Please read on.

“The appropriate pricing of the naira has been widely debated in the last 25 years. Unexpectedly, the naira rate to the dollar has spiralled from more than N1=$1 40 years ago, to its current rate of about N129=$1(2005). We recall that in the days of naira’s glory, the general standard of living, for more Nigerians, was well above poverty level, and Nigeria was also rated among middle income countries. However, our leaders unfortunately succumbed to the apparently innocuous campaign that the naira was grossly overvalued. The success of that campaign is evident in the present loss of over 90 per cent of naira’s value and the decimation of the purchasing value of all incomes. Not surprisingly, we are presently rated amongst the world’s poorest nations, to the satisfaction of our traditional international financial oppressors, who will gleefully, ‘charitably’ drop a few coins in our begging bowls to save our people from imminent starvation!

Instructively, however, the wider the gap between the black market and the official rate, the greater will be the motivation for round-tripping; i.e. the ‘sharp practice’ purchase of dollars from the official market to later sell at great profit in the black market. The CBN recently indicted several banks for such financial scams, which undermine the virtues of hard work and primarily promote the interests of rent seekers. Arguably, the distortions and dislocations from a wide margin between the two exchange rates could also destroy the ethics of genuine enterprise to induce economic stagnation. Although it is expected that the CBN would not knowingly promote an obtuse and destructive financial environment, inexplicably, however, the CBN’s auction of an additional $500m, to supplement its regular bi-weekly interbank forex sales, in order to drive the present black market rate of N142 nearer the official rate of N133=$1 was clearly counterproductive. Ironically, the official rate dropped to N129=$1 after the intervention, while the black market rate which formerly hovered around N142=$1 when the official rate was about N133 unexpectedly hopped instead to about N147!

Thus, we now have a wider margin of about N17 (instead of the former N9) for each dollar that is round-tripped. Evidently, there is no quicker or easier way to make money in Nigeria today than the foreign exchange market! The market for the CBN’s Treasury bills which previously provided an equally lucrative return of over 15 per cent to banks, has gone into a tailspin with treasury bill rates below six per cent, but the profit deficit has been quickly filled by the opportunity to make excellent returns from the foreign exchange and the newly introduced bond markets with incredible rates of return for first class government risk-free investments! The rationale for issuance of the current high interest yielding government bonds (up to 17 per cent) is questionable, especially when surplus idle reserves are simultaneously readily available to make such government borrowings unnecessary. It is instructive that no equity quoted in the Nigerian stock market presently provides a yield as close to what obtains in the bond market. Never mind the irony that most of the money for investment in such bonds and indeed, for the naira paid for the $500m ‘special auction’ are primarily, ironically funded from the extra liquidity made possible by the payment of humongous naira allocations to beneficiaries of the federation pool. It is clearly not contestable that our current monetary framework is not supportive of the real sector or inclusive growth!

In essence, the CBN’s virtuous posturing with regard to probity, accountability, abolition of rent seekers from our system and the prudent consolidation of our national wealth, may all have become propaganda, as what we have instead, is a promotion of those vices the same CBN seeks to eliminate to enhance economic and social welfare! What a paradox!

Unfortunately, the CBN’s propaganda will only succeed in deceiving Nigerians that things will get better, as we will be encouraged, as usual, to be patient! I recall that we were admonished to also exercise patience when the Structural Adjustment Programme was introduced over 20 years ago. However, Nigerians now know better, as their long suffering patience did not bear the desired fruits and if anything, we are now farther from the tunnel of economic redemption.

Yes, the naira is considerably undervalued, serious minded analysts will agree, but the current process of consciously, intermittently creating a naira hurricane, whenever federal monthly allocations are disbursed into the bank accounts of beneficiaries, is probably the naira’s albatross. Notably, the CBN’s subsequent attempts to mop up the unwieldy liquidity surplus with the regular sale of dollar rations either through DAS or any special auction is certainly a foolhardy way to appropriately price the naira exchange rate. The reality, of course, is that this framework can only promote the black market and round-tripping with the attendant negative effects on the economy. It will be interesting to observe the antics of the CBN as it struggles to explain the widening gap that allows over N17 to be made from each dollar purchased from the official market. I have no doubt it will find an excuse somehow and also find a scapegoat for the problems it inadvertently or maybe even knowingly selfishly engineered.”

Postscript January 2017: Eleven years after the above article was published, the disparity in naira exchange rates has returned with a vengeance. But, sadly, the popular solution canvassed, by the establishment and their collaborative and supportive experts, may also be a rehash of earlier failed policies that nurtured our present economic predicament.

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