In this thread I will try to explain the evil that is Dollar Subsidy A. K. A. Defending The Naira


First lets see some pictures to spice things up and 'ease' us into the depressing statistics ahead.

Below are pictures for earning from oil betweeen 2010 and 2014. For those us who may be thinking it is targetted at GEJ, it isn't in anyway neither is it a targetted at the present administration.

Source of Data

Chart of the day: The CBN Has Sold $217.2billion Between 2002 and 2014 ‘Defending the Naira’


The Dollar Subsidy Story Captured In a Chart

Source

The chart immediately above again suggest no. Nigeria has depreciated against the dollar continuously no matter how much is spent defending it. It’s either we import way too much stuff or we rely too heavily on foreign portfolio investments to drive the economy. Either way, they both result in enormous dollar outflows and if not balanced with larger export proceeds will result in a depreciation of the local currency. This perhaps is what has happened. The chart also shows a steep climb between 2009 and 2014 which coincides with when the we sold the most dollars.

So, whether the money was squandered or well spent it is left for history to judge as pundits on either side of the argument will defend their stance. However, based on the data we have before us and the recent devaluation of the naira, its obvious we haven’t don’t a good job at ‘defending the naira’ despite all the money spent.

Please note:
The original article was modified and amended to provide more details and clarity to the data.
Whilst defending the naira may not be the singular reason for dollar sales, the fact is that, if the CBN fails to sell dollars or cannot meet up official dollar demand the naira depreciates.Therefore, every time it sells dollars or forex for that matter it is in essense defending the currency from depreciating.

What Dollar Subsidy Entails

Some persons viewing might be wondering what defending the naira is all about. Well, simply put, it is a full blown subsidy scheme like the famous petrol subsidy scheme.

The way it works:
The CBN auctions off dollar (petrodollar) regularly (weekly) at a cheap rate in the FX market. This auction helps drive the dollar rate down as people with their own dollar (the real blackmarketters) won't want be able to sell at a much higher rate based on the natural demand and supply forces.
This drives the price down for all buyers on the average. A continuation of the dollar auction ensures a chaep and steady dollar rate that inspires confidence in investors as well as help importer get cheap dollar compared to what it would have been under pure market forces of demand and supply.
The populace too aren't left out as they get their much preferred imported goods at a very cheap rate.
This means every single imported item like Brazillian hair, shoe, electronic, rice, flour, tomato, toothpick, machinery, milk, fish, turkey, oil, and the well known PETROL are/were under some level of subsidy. PETROL was being subsidized twice technically.

The Exporters' Nightmare
It is a well known fact in dynamics of economics that net exporter of goods strengthen their local currency as they earn forex. So someone viewing this thread might be wondering what the CBN did in this regard.

Well, exporters who weren't favoured by the continued subsidy of dollar A.K.A. defending the Naira were at some point in time given export incentive to encourage them. The process got abused to the extent that people started exporting stones just to have the FG pay them some money. The scheme was stopped as expected of a responsible govt. (I thank the much bashed GEJ for this), but the continued subsidy of dollar meant our true exporters of non-oil produce were still being shortchanged.

Let me try to explain this.
Picture an exporter of cocoa or palm oil or cashew nut or charcoal who export produce or even our bloggers who export their services and earn in dollars. Now let's say they get $1000 quarterly (every 3 months), when the dollar sold for N165 that would be N165,000. The problem with this money is that the actual rate the dollar is going for ought to be much higher but it has been subsidized to appeal to majority of the populace who are consumers of imported goods. The actual value of the Naira could be as high as say N450 but due to subsidy it is now selling for N165. An exporter who is suppose to earn N450,000 will now be earning less than N165,000 Naira. They earn below N165,000 for $1000 because the blackmarketters they are trying to sell to need to buy below the selling price of N165,000 to make profit. It could be as low as N150/$.

And yet the exchange rate is still 400 naira+

Vilshow:
And yet the exchange rate is still 400 naira+

That N400+ is a result of the years and years of continual subsidy of the Naira. It could av easily been N800 - N1000.