Opinion: Killing Nigeria with multiple FX exchange rates, By Yemi Adebowale

I have spent quality time appraising and reappraising the International Monetary Fund’s Staff Concluding Statement on the 2022 Article IV Mission to Nigeria released nine days back. For me, the preliminary findings of the IMF Staff on Nigeria’s shambolic foreign exchange policy stand out.  I have persistently argued against the squandering of Nigeria’s forex which its management connotes. The IMF report aligns with my position, stating, “a unified and market-clearing exchange rate remains critical to enhancing confidence.”

It avowed: “The mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN, accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies. In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility.”

The IMF also urged the apex bank to allow deposit money banks determine FX buy-sell rates, in collaboration with the apex bank, which earlier this year, at the launch of RT200 policy, revealed its plan to stop selling forex to banks, allowing them to source forex for their customers.

The IMF reported further that an unsteady exchange rate regime is one of the numerous factors fueling devaluation, hindering much-needed capital inflows, encouraging outflows and constraining private sector investment in Nigeria.

This week, another Bretton Woods Institution, the World Bank, released a report on “Nigeria Public Finance Review”, and just like the IMF, also denounced Nigeria’s forex management, with a call for an urgent creation of a unified, stable market-based exchange rate.

The World Bank reported that an end to Nigeria’s crooked forex policy could help increase public revenues, noting that for years, a large share of Nigeria’s resources was being used to finance so many inefficient and regressive things, official forex rates inclusive.

This official forex rates must end. Forex must be sold at market rate. The era of multiple forex exchange rates must likewise end in Nigeria for this country to optimally utilise its forex. These are the key points the IMF and the World Bank are making in these two reports quoted above. They have persistently been making these points for years.

No doubt, if government forex is sold at market-based exchange rate, it would naturally eliminate sharp practices in the current official forex policy. Those benefitting from the skewed forex policy don’t want this to happen. A country struggling with forex can’t be selling the limited amount it has at dubious rates. But this is what the CBN is implementing in our country amid declining external reserves.

Direct inflow of USD into a system where there is one useless official exchange rate (that is also artificially low) is usually hindered. The demand management strategy currently being adopted by the CBN also needs a reconsideration. That was why Vice President Yemi Osinbajo called for measures that would increase the supply of foreign exchange in the market rather than simply managing demand, which opens up irresistible opportunities for arbitrage and corruption. The Vice President, who spoke in August last year at a Mid-term Ministerial Performance Review retreat, also made a case for a market-reflective exchange rate for the Naira.

Back then, Osinbajo professed: “We cannot get new dollars into the system, where the exchange rate is artificially low…It is a well-known fact that foreign investors and exporters have been complaining that they could not bring foreign exchange in at N410 and then have to purchase foreign exchange in the parallel market at N570 to meet their various needs on account of unavailability of foreign exchange.

“Only a more market-reflective exchange rate would ameliorate this. With an increase in the supply of dollars, the rates will drop and the value of the Naira will improve. The real issue confronting the economy on this matter is how to improve the supply of foreign exchange, but this will not happen if we do not allow mechanisms like the Importers and Exporters (I&E) Window to work.”  It was a simple and forthright position.

One deceptive argument beneficiaries of the manipulated Naira exchange rate always put forward is that the currency will crash further if market forces are allowed to determine its rate in the official market. This is false. Rather, the Naira will benefit from market-driven rate at the official forex market, because inflow will improve considerably. Many will be happy to sell forex in the official market. There will be no reason for round-tripping and speculative trading will die naturally. The Naira will thus appreciate. Pressure in the parallel market will also reduce.

Sharp practices are persisting in the purchase of official forex in Nigeria because of the huge gap between official and unofficial forex rates. The CBN knows this. For years, it has been struggling to ensure sanity in the Personal Travel Allowance (PTA) and the Business Travel Allowance (BTA) doled out to Nigerians at official rate. Round-tripping has persisted in the PTA/BTA arrangement because of the massive profit opportunities.

Some people simply collect PTA and BTA to resell. At a point, the CBN instructed banks to publish the names and Bank Verification Numbers of customers who abuse its forex policy. The apex bank lamented that it had received, and noted with concern, reports of sharp practices “by some unscrupulous customers,” circumventing the new CBN policy on the sale of forex for overseas personal and business travels”. The bank said some of the unwholesome practices included the use of fake visas and cancellation of air tickets after the purchase of PTA/BTA.

The CBN expects travellers to return unused PTA/BTA within two weeks as stipulated in the customer declaration form. It is demanding that if not utilised for the intended purpose, or if for any reason, the scheduled trip is cancelled, the PTA/BTA must be returned. The CBN is evidently being unrealistic. This will never happen. PTA and BTA at official rates must end for Nigeria to progress. Besides, it amounts to subsidising all manner of foreign trips. Somebody is going on holiday and getting forex at official rate! What is the business of the government with this?

Another manner through which the federal government has been squandering Nigeria’s forex is its allocation at a concessionary rate for payment of overseas tuition fees. The government has simply been subsidising tuition fees for Nigerians studying abroad. A good government must not be seen subsidising foreign education. It must not be seen subsidising the rich to send their children abroad for education. Between June 2015 and August 2022, the CBN provided a staggering $3.5 billion at official rate to fund education abroad.

A single exchange rate, determined by the forces of demand and supply, will invariably boost inflow of forex. This is the way forward for Nigeria. Our country’s economy will be the biggest beneficiary. In fact, Naira will gain from market-reflective steps.

Source: First published in Thisday Newspaper on Saturday