The Land of Multiple Exchange Rates

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On 21st April, 2017, the Central Bank of Nigeria announced a new exchange window for investors, exporters and end users. This portfolio investors rate brings the number of exchange rates to ten (even though more have been reported). There is the official exchange rate, interbank rate, international credit and debit cards rate, international monetary transfer organizations rate, Travelex rate, pilgrims rate, fuel importers rate, bureaux de change rate, and the black market rate.

This dysfunction is largely caused by a shortage. At the official rate, supply of forex falls short of demand. Thus, rates higher than the official rate, rates where demand seemingly meets supply have emerged.

The lag in supply stems from the international trade structure of the country, being a net-importer. Too few commodities earn forex; whereas the country is import dependent. The situation worsened in 2014 following the decline in oil price and production level as oil accounts for 70% of Nigeria’s forex revenue.

Government’s intervention in the market to protect the interest of strategic groups has further increased the number of rates. In 2016, pilgrims obtained the dollar at ₦197 whilst the official rate was ₦305. Periodically, the Central Bank directly sells forex to fuel importers, manufacturers, agriculture businesses and airlines at a subsidized rate. This makes arbitrage inevitable. These groups take advantage of the different rates and resell the forex at the market with the highest rate, further feeding the existence of multiple rates.

The simple solution would be to dump the current use of a hybrid of the fixed and floating exchange rate systems and completely float (or devalue) the naira – allow the market forces to determine its value. However, the immediate economic and political implications make this unlikely. A spike in inflation, an increase in interest rate, expensive imports will make the government unpopular.

Still, the current functioning of the market is not sustainable. As government’s interventions deplete the foreign reserves, the lower reserves increase expectations of devaluation and reduce confidence. The loss in confidence makes it less likely for foreign investors, whose forex we need, to invest in Nigeria.

Selective devaluation speaks inequity, scepticism and uncertainty. All of which are not ingredients of economic growth and development.

 

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