Wednesday, February 1, 2017

Widening Gap Between Official, Black Market Exchange Rates

By Henri Boyo
 In December 2016, the finance minister Mrs. Kemi Adeosun responded as follows in a text message to Reuters reporters that, “The CBN is working on the elimination of arbitrage.” Furthermore, Isaac Okorafor, CBN’s spokesperson, confirmed in a press statement that the bank was working towards “ensuring there is no black market,” see Punch 21/12/16.

In January, 2017,  the Vice President Yemi Osibanjo speaking at the World Economic Forum in Davos, Switzerland also noted that “The CBN needs to close the gap between the official and black market exchange rates for the naira “very soon”, see Punch 18/01/2017.

Furthermore, the Deputy Senate President, Ike Ekweremadu was also reported in Punch Newspaper edition of 19/01/17 to have noted that: “We are worried with the huge gap between the parallel and the official market; and as it has been said by the Chairman of the Appropriations Committee, the Central Bank of Nigeria needs to do something about it, because it is one thing that is breeding corruption …. We must find a way of bridging that gap and also stabilize the exchange rate so that investors can do their own forecast in terms of their investments. We believe that something needs to be done in the area of the exchange rate.”

The above title was first published in September 2005 and the following is a summary of that article:

“The appropriate pricing of the naira, has been a subject of debate in the last 25 years.  During this period, the value has descended from more than parity to its current rate of about N129=$1.  We recall that in those days of glory, the general standard of living was well above the poverty level; indeed, Nigeria was rated among middle income countries in the world. However, our leaders soon succumbed to the apparently innocuous campaign that the naira was grossly overvalued.  The success of that campaign is the current reality of a naira that has lost over 90% of its value and reduced the real value of the earnings of the masses to peanuts. We are now rated amongst the world’s poorest nations to the satisfaction of our erstwhile oppressors, who have in a show of charity gleefully dropped a few coins in our begging bowls to now save us from outright starvation! 

“The wider the gap between the black market and the official rate, the greater is the motivation for round-tripping; i.e. the immoral purchase of dollars from the official market and later sale at great profit in the black market.  Expectedly, the CBN had in the recent past indicted several banks for such financial scams, which undermine the virtues of hard work and promote the interests of rent seekers in the economy.  Indeed, the distortions and dislocations of a wide margin between the two rates of exchange could destroy the ethics of genuine enterprise and promote decay in our body polity.  So, it would be expected that the CBN would not knowingly promote such an obtuse and destructive environment, but surprise, surprise, the black market which formerly hovered around N142=$1 when the official rate was about N133 has now galloped to about N147; meanwhile, the CBN has unwittingly auctioned an additional $500m to drive the official rate down to about N129=$1.

“Thus, we now have a margin of about N17 for each dollar that can be round-tripped.  The foreign exchange scam, as we can expect is back in town!  There is no quicker or easier way to make money in Nigeria today than the foreign exchange market.  The market for Treasury bills which provided an equally lucrative return of over 15% in the past to banks has gone into a downward spin with treasury bill rates now around 6%, but the gap has been quickly filled by the opportunity to make quick bucks from the foreign exchange and the newly introduced Bond markets with unbelievable rates of return for first class government risk-free investment.  The rationale for issuance of the current high interest yielding government bonds is questionable especially when surplus reserves are available for real development and make government borrowing unnecessary.  Please note that no company that is quoted in the Nigerian stock exchange can provide a yield as close to what obtains in the bond market; never mind that most of the money for investment in such bonds and indeed, for the purchase of the $500m special auction come out of the extra liquidity provided via the payment of federal allocation to beneficiaries of the federation pool.  I will challenge any authority to disprove that our current monetary framework is supportive of such mismanagement of our economy.

“In essence, the virtuous postulations of the CBN to probity, accountability, abolition of rent seekers from our system may all have been sacrificed on the alter of mismanagement of our national wealth and what we have instead, is a promotion of those vices the CBN seeks to eradicate!  What a paradox!

“If the authorities in the CBN are men of integrity and honour, they will confess that their monetary policies and reforms have failed to deliver El Dorado to increasingly poverty stricken Nigerians and they will seek for help or alternative therapy, but unfortunately, they may only succeed in deceiving Nigerians that things will get better, and all we need, they would advise is patience!

“I recall that we were admonished to exercise patience when the structural Adjustment Programme was introduced about 20 years ago.  Nigerians have known better, their long suffering patience did not bear the desired fruits and if anything, we are farther from the tunnel and cannot begin for now to look for the light in the tunnel.

“Yes, the naira is considerably undervalued, serious minded analysts will agree, but the current process of consciously intermittently creating a hurricane of naira whenever federal allocations are disbursed into the bank accounts of beneficiaries followed by the subsequent attempt to mop up the unwieldy liquidity with the sale of dollars either through DAS or special auctions is a foolhardy way of appropriately pricing the value of the naira.  The reality is that this framework can only promote the black market and round tripping with the attendant negative effects on the economy.  It would be interesting to observe the antics of the CBN as they struggle to explain the widening gap that allows over N17 to be made from each dollar purchased from the official market.  I have no doubt they would find an excuse somehow and find a scapegoat to hang for the problems they had inadvertently or maybe even knowingly selfishly engineered.”


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