After months of taking a battering at the foreign exchange markets, this past week has seen the naira appreciate against the dollar from upwards of N500 to a dollar to N440 to a dollar, and the spread between the official and parallel exchange market rates reduce significantly.
This is largely due to the new policy of the Central Bank of Nigeria to provide direct additional funding to meet forex demands for personal and business travel, medical needs and school fees immediately.
It also achieves the objective of the policy, which was informed by a directive of the National Economic Council (NEC) to reduce the spreads between the official and parallel markets, most likely to disincentivize people involved in round-tripping by selling dollars obtained officially on the black market.
While the results of the policy are laudable, it is unlikely that it will be sustainable. It will not reduce demand for dollars and the spread is likely to widen again.
We are at this point because as revenue from crude oil sales have dropped drastically over the past two years, this administration has been insistent on not floating the naira against the advice of experts, both local and foreign.
As a result, the CBN has been dancing to its tune by trying ‘demand management’, cutting down the number of people accessing forex officially through the introduction of a list of 41 items for which importers cannot get cheap dollars. The end result is obvious – it has forced people to the parallel market and created such a wide difference between the official and black market price and allegations of a forex subsidy scam taking place.
The end results of the refusal to float the naira cannot be overemphasized: companies and manufacturers are starved of forex to import raw materials, leading to staff being laid off; foreign investors are staying away in order to avoid losing their investments, and the economy continues to lose overall as a result.
This new p0licy is the latest in a string of moves by the CBN and the Federal Government to make forex more available and cheaper but without floating the naira. This is because all other policies have failed: banning importers of certain items from accessing forex officially, claiming to float the naira but not really floating it, directing banks to not sell forex to international money transfer organizations, and then instructing them how to allocate their forex. All of these have failed in making forex available and cheaper.
This is because the CBN is disregarding well-established laws of economics and trying to achieve this objective through the backdoor. Based on recent history, it is safe to say that this recent appreciation of the naira is only a temporary reprieve.
The CBN should stop trying to hide its head in the sand when it comes to knowing the solution to our monetary policy crisis and it should move ahead to genuinely float the naira.
On its own part, the Federal Government should throw its weight behind floating the currency, and then moving forward with the necessary reforms that will move our economy forward. Its continued insistence in not floating the naira is a primary reason that there is such a wide difference between official and parallel prices of the dollar and only makes it easier for people to engage in round-tripping.
The longer we refuse to do the necessary thing, the deeper we sink into this economic morass.