Consolidate the forex market now

The dwindling revenue to the economy occasioned by the continued fall in oil prices makes it imperative for the Central Bank of Nigeria (CBN) to consider immediate consolidation of the foreign exchange market. Market consolidation, analysts have argued, will lead to the enthronement of a unified exchange rate for the purchase of foreign currencies. It will reduce the current pressure on the naira and bring about transparency and development to both the market and the economy.

We are of the view that the current situation where the various segments of the market – official, interbank, Bureau de Change (BDC) and parallel markets – have different rates at best provides arbitrage for some dealers at the markets, such as economic rent and round-tripping. Moreover, the fact that forex is sold at a lower rate at the RDAS than it is on other segments means that there is an implicit subsidy offered to those categories of demand that are able to source forex at the RDAS market.

We agree with Doyin Salami, a member of the Monetary Policy Committee of the CBN, who said at the November meeting of the committee, that “Continuing to use the Retail Dutch Auction System/Wholesale Dutch Auction System (R/WDAS) is simply to afford subsidies, unfairly, to a section of our population. This segmentation must be removed very urgently. It does us no credit and perpetuates a financial market subsidy enjoyed by a few – very similar to the subsidy on fuel!”

RDAS was established to subsidise forex for strategic industries, such as manufacturing, in order to make cheaper the import of capital goods needed for production. As a result, the official rate through which ‘essential items’ needed for the growth of the economy are imported remained at N155/$ from 2011 until last November when it was moved to N168/$ following the devaluation of the naira. Unfortunately, the manufacturing sector of the Nigerian economy has not benefitted much from this policy.

Meanwhile, the economy has witnessed naira depreciation in other segments of the market, with interbank rate currently at between N190/192 against the dollar, BDC at N193/4, and parallel market exchanging between N203/207 against the dollar in the same market. This has provided opportunity to some dealers who have access to the official rate by whatever means to possibly buy forex at the official rate and sell same at the parallel market.

Analysts have argued that continued availability of subsidised rate under the RDAS will only continue to provide incentive for the mis-categorisation of imports, a development that will ultimately defeat the noble intention of the CBN. Moreover, the pressure on Nigeria’s forex reserves and the currency means that any support to strategic industries by way of forex import subsidy will indeed be counterproductive.

Besides, the RDAS FX window has become much less relevant in recent times, especially following the tighter requirements for participation at the official window introduced last November by the CBN, which has made over 70 percent of imports to go through the interbank market at higher exchange rate.

It is on this note that we agree with the analysts that the time is ripe for the unification of the market. This, no doubt, requires greater boldness on the part of the CBN to muster the will to reform the systemic inefficiencies. It is understandable that at the moment, the apex bank might probably feel that scrapping the RDAS window and moving to a single unified market could mean operating from the position of weakness. However, the overriding objective should be saving the economy, particularly the manufacturing sector for which the subsidised rate was meant in the first place.