Guess who is dollarizing the economy!

 Any patron of Bureau de Change may find that a difference of about N10 per dollar now exists between the official rate of N155 per dollar ex-Central Bank, and about N165/dollar in the open market!  This is in place of the permitted one per cent markup officially allowed to commercial banks on dollar purchases ex-CBN.

In conformity with the law of demand and supply, the increasing market price of the dollar must be attributable to hoarding or the reality of more naira chasing dollars.  Paradoxically, however, according to the CBN, the increased dollar demand is not matched by a symmetric rise in imported goods; in other words, increasing dollars are demanded for speculative purposes or simply for custody as a store of value, in place of the naira.

The commercial banks have apparently taken advantage of the wider gap in forex rates to roundtrip dollars earlier purchased from CBN's forex auctions with large-scale dollar importation, for onward sale to Bureaux De Change (BDCs) and customers!! 

Surprisingly, despite the serious economic implications of such odious practice, no bank has so far suffered any serious sanction! 

In an attempt to puncture the perceived bloated dollar demand, last week, CBN rolled out a series of measures, which included withdrawal of the operating licences of 20 BDCs for purchasing and selling huge sums of dollars without required documentation; furthermore, commercial banks will henceforth only be allowed to import foreign cash after prior consideration and approval by CBN.

Furthermore the apex bank also raised the existing limit of US$40,000 to US$150,000 per annum for holders of naira debit and credit cards!  Question is, how many Nigerians earn this kind of money, and how much tax do they pay?  Nonetheless, the latest CBN guideline that recipients of forex money transfers (i.e. ex-Western Union, etc) shall henceforth be paid in naira, may inadvertently, actually drive the bulk of such remittances back into the 'black market', which offers better exchange rates! 

Similarly, CBN's reduction of BDCs' maximum weekly dollar purchases from $1,000,000 to "mere" $250,000, in spite of rising demand, might actually further reduce dollar supply and instigate naira exchange rate well above N165=$1.  Curiously, in retrospect, in August 2011, CBN management removed the limit on $1m/week sales to BDCs as part of measures to "sustain and ensure exchange rate stability"!!  Ironically, conversely, the slap-on-the-wrist penalty for those apprehended for smuggling millions of dollars out of Nigeria remains the simple forfeiture of 10 per cent of the foreign exchange value to government!

In addition to the latest measures, CBN also abolished the Wholesale Dutch Auction System (WDAS), under which banks could speculate, buy and hoard foreign exchange purchased from CBN, for onward sales to customers and importers; consequently, the Retail Dutch Auction System (RDAS) has been reintroduced, so that banks would now only purchase forex as per the specific demand of their customers.  Incidentally, RDAS failed in the past, and was substituted with WDAS, which is now again being replaced by the earlier discarded RDAS.  See our article titled "WDAS: Why is CBN Fooling Nigerians?" published in 2006, at http://www.lesleba.com/wdas.doc.

 Instructively, the earlier adopted forex market systems, such as FEM, IFEM, AFEM, DAS, all failed, just like RDAS and WDAS, to forestall extensive dollar hoarding and round-tripping!  Consequently, this latest reintroduction of RDAS is retrogressive and akin to a dog returning to its vomit! 

In reality, these forex market structures failed because CBN consciously ignored the other side of the equation relating to the supply of naira, because, as earlier indicated, when increasing cash sums chase any commodity whose supply is sticky or hoarded, the price of that commodity will invariably rise.  In other words, whenever naira supply increases relative to available dollars, the dollars price will rise with increased patronage!! 

So, any realistic and sustainable solution to the consequences of a beleaguered naira must recognize the cause of unceasing excess naira or excess liquidity in the market!  Every month, against the grain of economic wisdom, CBN religiously, borrows about N300bn excess cash at oppressive interest rates in order to reduce perceived surplus naira from the commercial banks and forestall inflation!!

Sadly, despite Lamido Sanusi, the CBN Governor's, belated "confession" of "unknowingly" sustaining the practice of borrowing back government funds in such transactions with oppressive interest rates, our leaders do not seem to care that the cumulative humongous public debts are ultimately not applied to infrastructural enhancement or improvement in our social welfare!

Although CBN and its surrogate parastatals such as Asset Management Corporation and Debt Management Office would swear that the perceived excessive spending of government is responsible for the unending surplus cash in the system, the truth, of course, remains clear, that the unending scourge of systemic excess naira is clearly the result of the ability of commercial banks to leverage multiple folds on the fresh inflow of hundreds of billions of naira, which CBN substitutes for distributable federation dollar revenue in monthly allocations to the three tiers of government!!  Surely, the CBN cannot sincerely contest this reality!  Besides, government's annual budgets below N5tn constitute less than five per cent of total estimated liquidity base (surplus cash) of over N100tn!!

Conversely, if dollar revenue allocations are paid with dollar certificates, we will immediately find that the destabilising problem of increasingly useless and surplus naira in the system and the accumulation of avoidable public debts will become a thing of the past, while the curse of systemic naira flush existing simultaneously with acute shortage of low-cost funds to the real sector will be exorcised!  Furthermore, the erstwhile artificial lopsided equation between naira and dollar supply will increasingly begin to be redressed in favour of the local currency!  Ultimately, a stronger naira will shift market preference from the dollar and reduce the propensity for round tripping and stifling dollar importation!

In conclusion, it is paradoxical that naira rate of exchange invariably comes under pressure simultaneously with increasing CBN dollar reserves; in other words, while the CBN hypocritically decries the excessive demand for dollars, and the higher propensity for Nigerians to hoard dollars, the real villain in the price mechanism that debases naira acceptability is actually the CBN, as it jealously hoards and presides over $40bn, after it has mischievously suffocated the money market with unbridled fresh naira creations substituted as monthly allocations for distributable dollar revenue! 

So, in effect, it is CBN's obnoxious monetary policy framework that repels market affinity/loyalty to the naira, and instigates the dollarisation of the economy with large-scale forex round tripping and re-importation of part of the dollars earlier purchased from CBN and remitted abroad by banks under WDAS.

SAVE THE NAIRA, SAVE NIGERIANS!!