This Day (Lagos)
Nik Ogbulie
9 August 2000
Lagos — It is no more an assumption that the various foreign exchange management process in the country in the past 20 years have met without stable results.
The reason is that much of the plans to achieve the desired targets were based on factors which are not under the control of the economy. The continued application of the process has reflected mere gestures as the variables in the economy have remained largely beyond the capacities of the trends that ruled the Nigerian economy.
Since the exchange rate of any country is governed by the interplay of demand and supply in the foreign exchange market, the Nigerian case becomes largely difficult because of the wide disparity between the production level of the economy and its consumption level. Since the disparity has continued to be a rising occurrence, different policy inputs have found it difficult to maintain a balance.
In other words, for the rate to be stable, at a desired level; overtime, on short term and medium term basis, the economic fundamentals underlying the foreign exchange market have to be right. More importantly, the domestic economy must be productive so as to reduce the demand for imports and increase exports, which is a major source of supply of foreign exchange.
The various efforts, put in place by the Central Bank of Nigeria (CBN) are mere conscious efforts to elicit stability based on the assumption that various indices in the economy will be improved to boost the anticipations within a time period.
According to the CBN, maintaining a realistic exchange rate for the naira is very crucial, given the structure of the economy and the need to minimise distortions in production and consumption, increase the inflow of non-oil export receipts and attract direct investment.
It believes that the persistent problems of import dependency, capital flight and lack of motivation for backward linkages in the production process would be addressed.
From all indications, the challenges in maintaining the various rate trends in the economy have continued to become quite enormous in view of the growing levels of needs in the various areas without a corresponding presence of domestic efforts that would provide avenues that could match the level of such demands.
A careful consideration of the exchange rate trends indicates that the following challenges have posed an enduring difficulty in the management process of the rate since 1986:
* The purchasing power parity (PPP) measure, which has been applied as a guide to movement in nominal exchange rate by the CBN to determine the deviations from the equilibrium exchange rate, has no clear criteria for choosing a base period since it ignores the short term policy actions such as the tariffs;
*The unanticipated shifts in economic and political conditions, including avoidable distortions perpetrated by unpatriotic process in the system;
* Cases of disturbing revelations regarding malpractices being perpetrated by all authorised dealers in collaboration with end-users throughout the system;
* Growing spate of speculation, rent-seeking behaviours;
* Failure to diversify the country's production and export bases not only enhance the nation's foreign exchange earnings but to reduce foreign exchange demand.
However, the CBN believes that it is becoming increasingly recognised that whatever exchange rate regime a country may adopt, the long-term success depends on its commitment to maintenance of strong economic fundamentals and a sound banking system. It noted that in this regard, exchange rate derivation should be influenced by the strength of the economy in terms of its production capacity, structure, diversification of the production and export base, as well as the soundness of macro-economic policies. This, according to CBN, because the system would be destabilised and unstable when macro-economic policies are not properly co-ordinated and directed towards the attainment of market stability.
It could be recalled that since 1986, the exchange rate management policies have continued to be fine-tuned in accordance with changing economic circumstances, for instance,
* A dual exchange rate regime, with the introduction of the second-tier foreign exchange market (SFEM) at the inception of SAP in which the official rate operated side by side with the SFEM was approved from September 1986 to June 1987.
* A unified exchange rate under the Foreign Exchange Market (FEM) was introduced in July 1987 when the SFEM and the first-tier rates were merged
* In 1988, the FEM was transformed to the Inter-bank Foreign Exchange Market (ITEM), under which the exchange rate was largely market determined, using several methods for the allocation of available foreign exchange
* The fully deregulated exchange rate system of 1992, in which ITEM rate was merged with the parallel market rate with the aim of eliminating the parallel market premium
* The retreat to a fixed exchange rate regime in 1994 with the re- introduction of administrative controls and re-regulation of the economy as well as the centralisation of all foreign exchange receipts in the CBN with the intention of instilling sanity in the market
* The dual exchange rate regime comprising a market determined Autonomous Foreign Exchange Market (AFEM) rate for private sector transactions and a fixed official rate designated for bona-fide official transactions from January 1995 to December 1998.
* The adoption of the Inter-Bank Foreign Exchange Market (ITEM) on October 25, 1999.
The trend explains the enormity of the kind of challenges which the management of forex has elicited over time. It could be explained that much of the challenges hinge on the difficulties in engineering adequate foreign exchange framework vis a vis the level of production in the economy.
The activities of bank speculators and the evidence of irregularities could be said to have constituted an insignificant quantity in the forex exchange management pattern in the economy. With a good productivity base and less dependence on importation, the level of malpractice would not command any quantum distortion. If supply and demand equilibrium remains perfect, the issue of irregularities would be quite insignificant, as it happens in other countrie
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