Lagos — Recently, the Central Bank of Nigeria (CBN) further tightened its grip of the foreign exchange market by barring oil and oil services firms, the Nigerian National Petroleum Corporation (NNPC) and other government agencies from selling foreign exchange directly to commercial banks. It said the move was in a bid to avoid leakages and abuses in the utilisation of foreign exchange.

Before this directive, oil companies sold foreign exchange to banks to meet their financial obligations through a bid auction on monthly basis. The rate of exchange was not determined by the CBN but by both parties (oil companies and banks) and they report on the transactions to the CBN.

The CBN controls, which began by limiting the supply of foreign exchange to banks on November 26 last year, is to protect foreign currency reserves following the plunge of oil prices and dwindling revenues.

As part of the new controls, trading in Nigeria's inter-bank foreign-exchange market was halted on February 10. The new restrictions automatically make the CBN the only official source foreign exchange to banks that bid on behalf of their clients through the bi-weekly Retail Dutch Auction (RDAS), which was re-introduced mid January to replace the Wholesale Dutch Auction (WDAS).

The last time the market was controlled in such fashion was during the late General Sani Abacha's regime in 1994. Then, the growing parallel foreign exchange market was said to breed corruption and distort the financial system.

CBN Governor, Prof. Chukwuma Soludo who said the country's exchange-rate policy will focus on conserving foreign reserves, explained that the new measures are "temporary" and "a direct response to an unusual time". "We've got to conserve what we have because we do not know how long the global crisis will last," he said. Nigeria's foreign currency reserve is now some $48 billion,compared to $63 billion late last year. Export earnings took a plunge with crude oil prices which has fallen from a record $147.27 a barrel in July 2008 to an average of $40 a barrel. With the global economic meltdown, remittances from Nigerians abroad and foreign investment have also reduced, but we notice that foreign exchange outflow has increased.

About $6 billion outflow per month at times like this is rather high. This may not be unconnected with the resurgence of money laundering. We therefore call on the Economic and Finance Crimes Commission to investigate the trend.

Following the initial reaction of the CBN to the depreciation of the naira and suggestions that the Federal Government was benefiting from a weak currency, we had called on government on this page to clarify its position.

Now that the situation has been clarified, we urge the Federal Government and the CBN to consider the disadvantages of the controls carefully and move quickly to ease the pains of unintended consequences.

Although the exchange rate of the naira has stabilized at between N145 and N146 to the dollar at the official window, it has depreciated to over N175 to the dollar at the parallel market, which is enjoying a boom. But Soludo is reported to have said he is concerned about funding legitimate demands for forex at the RDAS, and not the parallel market, where the rate might be going up because it is funding illegal transactions.

"Since we shut inter-bank trade, demand at RDAS has fallen by a half - meaning that much of the demand at the RDAS was basically to fund inter-bank trade (not to meet the demand of end users). We also found out that people that want to evade documentation at the official window patronise the bureau de change. We cannot continue to use scarce foreign exchange that belongs to all Nigerians to fund the money laundering activities of a few people," he has said.

With a depreciated naira, government certainly has more money to spend locally, and we notice that even though statutory allocation to the states has fallen, the states would have received much less at last year's exchange rates of the naira.

However, with the depreciation, imports of goods and services have become more expensive, and going by Nigeria's high import dependence this may fuel inflation. Under normal circumstances, local producers would have enjoyed a boom from supplying local alternatives, but this advantage may be countered by the high cost of production. The same fate befalls exporters, who would have enjoyed increased demand for their relatively cheaper goods abroad. If local producers are to benefit from the depreciating naira, government must move quickly to remove their handicaps.

We are also worried about the fate of many Nigerians who the former system allowed to operate domiciliary accounts from which they paid bills like their children's school fees abroad. Making such payments through heavy documentation and the bureaucracy at the banks will now be frustrating.

Elementary economics shows that situations of excess demand over supply are very challenging to handle. With the weakness of the oil market, the rapid loss of forex inflows, and a weakening external reserve base, the CBN faces an uphill task in controlling the foreign exchange market. We strongly recommend caution and careful consideration of the overall effects of all decisions in this regard.