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Tuesday, June 28, 2011


     Of the varied forces that determine the fortune of an economy, foreign exchange determination can be categorized as having important significant. Hence, it classification under the major macroeconomic goals of any economy. Exchange rate determination, the price at which a country’s currency is exchange for that of others, is such a lofty goal that a government can lose its legitimacy because of this. Diplomatic uproar can result from disputes on how to determine it.  In the past, nations had gone to war over exchange rate related matters. That is why when nation like Nigeria has some questions to answer with regard to her foreign exchange policy, a serious regime will listen carefully. The major borne of contention in the diplomatic relation between the United States and China in the last one decade, was on what shall the price of China currency (Yuan) be in relation to it trading partners. Even though Naira is not an international currency, its determination shall be of concern to people residing in Nigeria and few outside that have business to do with the country. Some few weeks back, there was an uproar when the World Bank recommended to the Nigerian authorities to reconsider further devaluing the Naira. The bank recommendation was base on the fact that at it fixed rate Naira was not sustainable. But, many Nigerians condemn the World Bank and upheld Sanusi for saying that he would not devalue the Naira. But even though I was not entirely against Sanusi position at then, I also did not see any wrong in World Bank advising Nigeria CBN to consider devaluing the Naira. At that time our foreign reserve position look perilous, our main exports were in weak position and our interest rate was unfavorable. Sanusi’s CBN was only able to maintain the 151Naira to 1 Dollar at that time by continued depletion of our foreign exchange reserve. The events of the past few months have justified the World Bank stand, Naira has depreciated from around 151 to a Dollar to around 153 to Dollar. Though Sanusi main excuse was that devaluing the Naira would only worsen inflation, which he was trying to fight. But, a cautious depreciation of Naira (which Sanusi ended up doing) was the better thing to do.  In developing countries like Nigeria, no one wants to be caught towing the line of World Bank and IMF, the two major capitalist institutions in the world.  Hence, Sanusi's public rejection of the recommendation.

    The history of Nigeria foreign exchange management is a record of upswing, policy somersault, and absent of clear road map to steer the Naira in the turbulent sea that happened to contain far bigger sharks and predators.  Starting from the time of independence when policy was anchored to that of United Kingdom ( the time of Nigerian Pound) where the currency moved up and down together with the Pound Sterling to the presence when we operate a kind of manage float, we are yet to have a realistic foreign exchange regime. Most of our foreign exchange options are nothing more than ‘I hope things will return to normality’ that nations around the world put forward when they don’t have something better. As any student of Economics will tell you, determination of foreign exchange is one of the most complex areas of economics. It is not a tea party as some of our policy makers want us to believe. It is not something that can be carried out in vacuum, without considering the consequences of action on other areas of the economy. For example, what happens to inflation, interest rate, employment, and production as a result of towing the wrong exchange determination path? Since the appointment of Sanusi as the CBN governor in 2009, one thing every body agreed Sanusi has achieved is bringing some kind of stability into the banking industry. But for the other two assignments, inflation control and determination of realistic exchange rate, CBN governor can be said to have achieved little success. Despite CBN efforts to narrow the gap between the official exchange rate and what obtain in the parallel market, the gap seem to be increasing.  Any person who has attempted to purchase forex will tell you that the task is herculean. Whether you purchase Forex through official channel or the parallel market it is the same, as if the market was not free market. Behind the door, deals are still been carried out as if there is no market regulator. Though Banks illicit trade in the market has been curtailed by the apex bank, some other not necessarily official transactions are going on. We are all aware of the last few years when banks forget their official duties in favor of making quick profit made possible by illicit trade in Dollars and Pounds. To me the only realistic way that all these abuses will be checked is by further liberalization of the market to reflect existing realities. Though this shall be done in the most cautious manner possible, to avoid the repercussions of hasty liberalization of foreign exchange markets.