Between single and multiple exchange rates

By Bay Ismoyo

At the 2018 Spring Meetings of the IMF/World Bank Group, Finance Minister Kemi Adeosun repeated the quest for external loans, which was first made at the 2017 Spring Meetings. The borrowings were/are purportedly intended to provide infrastructure although the minister has divulged that any procured funds would go to the CBN to beef up “CBN’s external reserves.” But with the benefit of hindsight, any contracted external loans would ultimately be frittered away through the inappropriate CBN multiple foreign exchange market segments. Nonetheless, since 2017 the trio of FMF/CBN/DMO has facilitated accumulation of external loans by means of Diaspora bonds, Eurobonds and refinancing of parts of the fake national domestic debt. This newspaper’s editorial on 26/3/18 drew attention to bloated outstanding foreign debt figures which are unacknowledged by DMO for 2016 and 2017 as contained in the 2018 IMF Article IV Consultation report. It is unclear whether the Bretton Woods institutions sought to suborn retrospective legislative imprimatur for those debts as well as commitment to future debt tranches by inviting the Senate President to the Spring Meetings. The Buhari administration’s worst, nay, most wicked decision will be to continue its forex loan binge on dubious ground that such loans attract interest rate of seven per cent after it has been proved beyond any doubt that the operation of a single forex market would result in much lower interest rates of four per cent and thereabout on naira-denominated debts. The external loan option is unacceptable.

At the Spring Meetings, the CBN similarly sang a stale song about the comeliness of its Importers and Exporters (I&E) forex window, which brings into existence at least five CBN multiple exchange rate fixing segments. After one year in operation, the I&E has failed to bring about production-friendly lending and inflation and exchange rate levels. In this regard, the IMF in Washington maintained its stance released in Abuja during the 2017 and 2018 Article IV Consultation rounds that a unified exchange rate was/is simpler. That is correct. However, the IMF version of single exchange rate system as may be gleaned from the IMF staff report that accompanied the 2018 Article IV Consultation Press Release would not put Nigeria in good stead. Should anything different be expected from IMF/WB, the alter ego of Western interests? In any case, does Nigeria have to go to the IMF/WB to learn how to operate an exchange rate fixing system that produces a market-determined unified/single naira exchange rate?

The CBN’s multiple exchange rates have a parentage which reaches back to the 1970s and under which the country has been paying a heavy price. The price in terms of degree of economic progress is evident from scores and rankings under IMF GDP (PPP) at purchasing power parity per capita, which reflect the cost of living and welfare among countries. For example, with GDP (PPP) per capita world rankings shown in brackets, among OPEC’s 14 member countries (six among which are in Africa), Nigeria (129) brought up the rear in 2017 after continuously diverting its 60 year-long stream of oil forex earnings to water and grow other economies. But by husbanding their oil resources well, Qatar ranked (1) and United Arab Emirates came in (8). Among some of Nigeria’s erstwhile peer economies, their world rankings by 2017 were Singapore (3), South Korea (30) and Malaysia (46). Also out of the four MINT countries which in 2014 were tipped to be among the world’s fastest growing economies from 2015, Nigeria almost immediately dropped below the radar. In 2017, Nigeria was struggling sluggishly out of an avoidable recession. That year the other three countries’ rankings were Mexico (65), Indonesia (97) and Turkey (53).

To defiantly ignore consistently sound economic management as the bedrock for attainment of high cost of living and welfare indicators by attributing Nigeria’s laggardly position to its high population is belied by available facts. The IMF GDP (PPP) per capita world rankings (shown in brackets) among the world’s seven most populous countries in declining order of population size are as follows: China (79), India (122), U.S.A. (11), Indonesia (97), Brazil (81), Pakistan (135) and Nigeria (129). In terms of actual population and GDP (PPP) per capita numbers, for example, note China (1.42 billion, International $16,624), India (1.35 billion, International $7,174) and Nigeria (196 million, International $5,927). For Nigeria, the relatively low population did not turn the tables. China and India, either of which harbours seven times Nigeria’s population, outshone Nigeria.

Besides, there are some useful lessons. One, to signpost the triumph of good economic management, while Nigeria’s policymakers blamed the collapse of oil prices for five quarter-long economic contraction in 2016/17, China and India’s economies grew in 2016 by 6 per cent and 7 per cent respectively. Two, while Nigeria’s poverty incidence soars by the year (it is over 72 per cent), over 50 per cent of China’s population was raised above the poverty line in the past one decade. Three and quite tellingly, although China’s largely export-driven rapid growth fetches forex aplenty (the external reserves currently stand at US$3.14 trillion), the economy rests firmly on that country’s national currency, the renminbi or yuan.

By contrast, Nigeria’s fiscal and monetary and legislative policymakers have tried their damnedest to make the dollar the preferred currency to the ruination of the national economy. Sadly, the Nigerian legislature has forsaken its oversight function and watched unconcernedly over the years as the CBN breached with impunity the constitution of the country, the CBN Act and the yearly Appropriation Act. The Senate has failed since 2016 to pass a bill submitted by the Nigerian Law Reform Commission seeking to set time limit to holding funds in domiciliary dollar accounts. The bill signifies overdue formal burial of the military regime-imposed Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 1995, which deceased in May 1999, with a view to restoring the naira to its constitutionally-given preeminent position of national currency.

Forty-seven years into steadfastly spurning use of the economic best practice method in favour of experimentation with exchange rate fixing methods that have failed elsewhere, the CBN’s multiple forex market segments, according to the IMF, include (i) the CBN official window rate of N305/$1, (ii) a retail/wholesale window rate of N325-330/$1, (iii) the I&E window rate of N360/$1 since last September, (iv) invisible transactions through BDCs and SMEs separately window rate of N360-365/$1, and (v) some government transactions (e.g. FAAC allocations) at a rate closer to N320-325/$1. “Nigeria maintains exchange restrictions and multiple currency practices subject to IMF approval under Article VIII Section 2(a) and 3.” Clearly, the country secured IMF approval to operate the complex and infinitely injurious multiple exchange rates (multiple currency practices) which exist in only 14 per cent of IMF member countries! Who made Nigeria a colony of IMF/WB?

The multiple exchange rate regime is actually a straying by CBN off course which not only promotes currency speculation and trafficking at the expense of real production domestically but also provides avenue for milking government revenue. CBN’s oft-stated expectation that its multiple exchange rates (which are artificial) would eventually converge is analogous to awaiting a second sunrise in one day. Nigeria’s sunrise of converged (single) naira exchange rate occurs annually in the form of the Appropriation Act exchange rate (AAR), which represents the legislated (dirty managed float) central naira exchange rate (do policymakers not know?) The objects and specific provisions of the CBN Act envisage the apex bank should float the naira in a single forex market within the AAR+/-3 per cent stability band.

Apart from it being inappropriate for CBN to engage in primary sale of withheld FAAC dollar allocations which do not qualify as external reserves, the multiple exchange rates falling outside the price stability band represent ultra vires devaluation that induces the high inflation and lending rates with the all-too-familiar adverse accompaniments. Also floating the naira with the AAR at the centre allows the Budget Office and the FMF to channel the revenue being leaked by CBN to interlopers through the multiple forex market segments to the public kitty by imposing a graduated forex access tax on imports duly classified by priority of the country’s needs along the lines outlined in this newspaper’s editorial of 23/10/17. And pathetically lost on the monetary authorities is the fact that only the AAR-centred market-determined naira exchange rate guarantees the “ERGP’s monetary policy (objective) to encourage growth without price volatility.”

And so, to pave the way for Nigeria to earnestly embark on economic progress, government should ensure faithful implementation of the sure-fire single forex market exchange rate mechanism as already stipulated in all versions of the enabling law of the CBN from its inception just before Nigeria’s independence in 1960.