₦airaland Forum

President Buhari is correct in believing that our currency does not need to be devalued – for the time being. For example, no amount of devaluation will bring up the price of oil. Devaluation will not eliminate parallel market players, nor will it necessarily increase the supply of dollars into the market. In actual fact, devaluation will simply push the official rate (and by extension, the parallel rate) up, thereby compounding the currency crisis and further driving more players to the parallel market. Inflation will rise, impacting the cost of essential products and services within our economy.

The sum-total of the aforementioned points is that it is unhelpful to conclude that our naira should be devalued, because we simply do not have any rational indices for measuring the naira’s true value. A further devaluation will devastate our economy because it will technically make our imports more expensive and our exports cheaper. This is somewhat unhelpful to us because we import practically everything and export very little except oil, whose price is determined internationally and whose supply is quota-based. Therefore, the gains of devaluation would be inapplicable to our situation, while the adverse effects- higher import prices, higher rate of inflation, more pressure on the demand for dollar, higher unemployment and general recession- would be catastrophic to us.

Perhaps, a silver lining in all of this can be adduced from our recent experience with petroleum importation, pricing and marketing. The introduction of the subsidy regime by the Obasanjo administration around 2005- whilst commendable in its intent to maintain a low pump price on our imported petroleum products- turned out to be a catastrophic and costly error on the part of the previous administrations that retained it. The subsidy-era was marred by market instability, regular fuel shortages, a thriving black market for fuel and huge debts allegedly owed to importers. Now that the subsidy regime is virtually non-existent, the market has gradually become stable, and many of the associated problems have disappeared. First, there is only one recognized market price (at the filling stations) across the country. Secondly, there no longer exists a thriving parallel market for petrol; there simply is no need for one, as there is no scarcity or bottleneck in the supply chain for now. Thirdly, suppliers are motivated to supply because the pump price has been determined by factoring all possible costs and profit margin from point of purchase to point of sale. In addition, this system will always adjust the pump price mechanically, thereby guaranteeing regular supply at all times. The end result is that consumers are invariably assured that supply will be regular and price will continue to be market-determined.

There is no guarantee that this current solution will be permanent, but it is at least a marked improvement from the previous uncertainty. A replication of this way of thinking by the CBN will go a long way towards returning normalcy to our currency market.
What then is the way forward with our currency? First, the Federal Government has to fast-track its efforts towards implementing a sustainable fiscal policy regime tailored towards boosting our local industry. Curbing corruption, promoting import substitution and the exportation of indigenous products will go a long way in achieving this aim. Countries like India, South Africa, Malaysia, Indonesia and Egypt have little or no oil dollars, but all have more stable currencies and stronger liquidity than we currently do. They have been able to successfully tap into these “other sources” and develop a stable foreign exchange system with a thriving market to boost supply and manage demand.

Secondly, a critical solution lies in our ability to bring sanity to our foreign exchange system and have better controls over the demand and supply mechanism. As a matter of national emergency, the parallel market has to be destroyed. The Foreign Exchange (Monitoring & Miscellaneous Provisions) act of 1995 as amended, the Money Laundering (Prohibition) Act of 2011 and other Laws of the Federation are some of the legal tools available to enforce the collapse of the parallel market.

The CBN has to overhaul the foreign exchange regime by bringing all legitimate buyers and sellers into the official market. For example, the use of credit cards to make purchases online and in foreign currencies should be re-introduced, with each authorized dealer setting its own limit depending on capacity. The way to do this is to simplify the buying and selling process by making documentation easy and seamless, and accommodate all economic users of foreign exchange. The buying and selling process could be simplified through the authorized dealers with clear and unambiguous rules, while CBN provides adequate supply to the market at all times.
Finally, and perhaps most crucially, the CBN must create a buyer surcharge and seller premium system. Under this system, buyers of foreign exchange for products and services categorised as essential or critical to the economy would be sold foreign exchange at the official buying rate. Rather than impose restrictions and/or bans on other users of foreign exchange outside the essential list, the foreign exchange could be sold to non-essential categories at the same official buying rate (a single exchange rate system) but with an additional fixed surcharge imposed for accessing foreign exchange. This will be paid upfront at the point of purchase to the coffers of government. It can be categorized as a special tax for users of foreign exchange for purposes considered as non-essential or non-contributory to the progress of the economy. This special tax becomes a premium to government. It will be an immediate boost to the national revenue, and the Government may choose to utilize this fund to promote and boost the non-oil export sector. It will also make these products and services more expensive, and possibly have the long term effect of discouraging the importation of non-essential items.

Simultaneously, suppliers of foreign exchange to the market can be incentivized into selling at the official selling rate, while also earning an “incentive premium”. It should be noted that the CBN is not the only supplier to the market. Other suppliers include oil firms, exporting firms, Nigerians in diaspora, foreign investors, foreign lenders, etc. These suppliers could provide a much higher volume to the market than the CBN if motivated and encouraged. For example, an incentive premium of 10% could be paid from the surcharge proceeds to encourage and motivate suppliers to bring their foreign exchange to the official market. This system of surcharge and premium could be sustained until the market stabilizes. The CBN would simply midwife the process by maintaining and aggregating adequate supply into the market as much as possible. It would also be responsible for posting the official daily buying and selling rates based on market fundamentals, managing the surcharge and premium regime, and determining the categorization of essential users on a periodic basis. It should also put in place a regular audit and monitoring process to ensure strict compliance and adherence.

The immediate effect of effectively implementing the above recommendations will be a single official foreign exchange market with all players (buyers, sellers, dealers, government) adhering to the same set of rules and regulations. The parallel market would die a natural death, and there will be an efficient pricing mechanism with a single exchange rate. This in turn will lead to an effective and efficient management of our foreign exchange reserves, and will enhance the attraction of foreign exchange into the system from other sources. Putting the tax and incentive mechanism in place will have the combined effect of encouraging supply and penalizing the frivolous use of our scarce foreign exchange. This also creates a new source of revenue for the Government, and acts as a check on those who would normally cheat on import-duty payments. The economic impact will be appreciation or depreciation, but not a devaluation of the value of the naira. There will be market and price stability, gradual confidence restored back to the single market and demand and supply equilibrium.

It would become easier for the Federal Government to deploy its security apparatus and other legal instruments towards chasing away the remnant players in the illegal market when the CBN successfully brings the legal buyers and sellers into the official market. With regards to the parallel market operators, the Government should apply the same vigor that it is adopting in its pursuit of corrupt officials, because every effort to manage our foreign exchange market will simply be like pouring water into a woven basket until the parallel market is eliminated or reduced to insignificance.

Any attempt to devalue the currency for the time being would amount to treating an ailment without a proper diagnosis. In fact, many of these issues have been with us for over 35 years. They are not going away until we take a firm stance towards rendering the underground foreign exchange market insignificant and irrelevant. This will allow us to focus on addressing the actual value of our currency against the dollar and other currencies.
Otunba Femi Pedro is a Banker and an Economist. He is a former Deputy Governor of Lagos State, and the former Managing Director of First Atlantic Bank (FinBank) Plc.

Too long

Some good suggestions but I don't see how the parallel market can be effectively destroyed. DMB'S are the biggest beneficiary of the current arrangement, they will do everything to sustain the parallel market.

Informative!!!

989900:
You just wasted a good opportunity at gaining some valuable knowledge.

Kindly give me a summary of what you read