Please permit to join the bandwagon and talk about Nigeria’s present monetary policy.
The Central Bank of Nigeria has decided that scarce foreign exchange cannot be released for frivolous items which can be produced within the country. Concurrently, the CBN has artificially pegged the USD at N200 when banks and other exchange traders are selling at N300-N390. This disparity has created an official-to-market-exchange industry where people get USD at official rates and sell at market rates. I’ll illustrate with an example.
To my dad’s relief (and mine), the CBN has not added school fees to their list of wastages of foreign exchange, but there is now a need for an invoice and longer wait times. This security feature can be easily misled by official-to-market-exchange players.
Let’s say David writes an invoice of $4000 rent to his partner, John, with his $2 invoice slip. John then gets to a local bank and requests dollars at the official rate. Because the $4000 request isn’t too high and rent is not one of the banned expenses, CBN approves the transaction. If 3 such transactions are done, we see that David & John have a cool $12000 at the official N200 rate. Let’s say they cash this money and fly back to Nigeria individually with this cash. Say David & John are in Nigeria at a time when market rates are N370, they can sell their USD at the ungreedy price of N340. Imagining their flights do not cost more than $2000 and they spent $1000 in abroad before coming back, that’s a cool N1.2 million round-tripping profit.
Note that Forex trading is a legitimate and necessary business but the current CBN policies will likely remain ineffective and self-defeatist. I think the Naira should be allowed to float up to a higher maximum, say N300. This will reduce pressure and panic, universal economic drivers, and all but eliminates the parallel market discrepancy. It is then sensible for foreign investors to plough dollars into our naira economy. Right now, ploughing dollars adds at least 50% value loss to the already numerous list of obstacles businesspeople go through in we country.
As the saying goes, “all fingers are not equal”. While we the people justify our forex demands and swim through lava to get the official rate, Mr Dangote has been assured of getting $14 billion at official rates. This subsidy, half the current balance of our treasury, is just the latest example of unfair advntages Alhaji D gets. Apparently, these funds will be ploughed into the Dangote refinery in lagos scheduled to ome online circa 2018. This 600 000 barrel per day refinery is, in my view, trepidating at least and I will probably write about it in another post.