15 August 2007
analysis
Lagos — In Nigeria, foreign exchange management policies have traversed the extremes of fixed and flexible regimes with a view to achieving the following major objectives:
- preserve the value of the domestic currency, the naira;
- maintain a favourable external reserves position, and
- ensure price stability.
The immediate post independence era witnessed a regime of fixed exchange rate in Nigeria, as matter of concern was the economic developments. Up till 1967, the naira was fixed at parity with the British Pounds until when the latter was devalued by Britain.
From 1967 - 1974, naira was fixed to the dollar, and thereafter the naira was fixed, using import weighted baskets of currencies of Nigeria's seven trading countries (US dollar, British Pound, German Mark, French Franc, Japanese Yen, Dutch Guilder and Swiss Franc). However, all the various exchange rate policies could not lead to the realization of the objectives stated above. As a result, a flexible exchange rate policy was adopted since 1986, following the introduction of the Structural Adjustment Programme (SAP).
Exchange Rate Policy
Following the failure of previous macroeconomic policies to turn round the economy, Nigeria adopted SAP in September, 1986, the major element of which was the pursuant of a realistic exchange rate. With the introduction of SAP, the second-tier Foreign Exchange Market (SFEM) was established. SFEM was expected to produce a market determined exchange rate that would remove the overvaluation of the naira which persisted in the pre-SAP era. Since 1986, various exchange rate policies, ranging from dual exchange to unified exchange rate system in 1987 were adopted.
In 1994, regulation of the foreign exchange market was re-introduced with rate fixed at N22/US$1. However, because of inherent abuses and bureaucratic bottlenecks associated with regulation the system was short-lived.
In1995, the Autonomous Forex Market (AFEM) was introduced following the promulgation of Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 17 of 19955 and the abolition of Exchange Control Act of 1962. Under the AFEM, CBN was to intervene in the market as short notice.
Failure of AFEM led to introduction of Inter-bank Foreign Market (IFEM), a pre-cursor to Dutch Auction System (DAS) in October, 1999. IFEM was aimed at, among others, deepening inter-bank foreign exchange market as well as having a stable naira exchange rate.
Developments in IFEM namely, persistent high demand for forex, continued depreciation of the naira with premium between official rate and those in the parallel market widening from N7.0470/$1 in 1999 to N16.3808/US$ in 2002, and continued depletion of reserves position led to its abandonment and the re-introduction of DAS in July 2002.
The Dutch Auction System (DAS)
Having previously been introduced in 1987 and 1990-91, DAS was re-introduced to address the failures of IFEM. Specifically, it was geared towards achieving the following:
- determination of exchange rate of naira;
- conserve external reserve position; reduce the premium between official rate and the parallel market; ensure stability of the naira exchange rate.
The Wholesale Dutch Auction System (DAS)
Having operated DAS for about three and half years, the CBN last February introduced the WDAS which has since being in operation.
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