Central Bank of Nigeria and Foreign Exchange

Central bank of Nigeria (CBN) has been struggling to stabilize Naira against major foreign currencies, especially dollar, Euro and British pound since Naira was floated. So far, Central bank’s effort has not yielded desired result. The CBN goal is to stabilize Naira to where it will trade at 300 or below to one dollar. The result so far is when the Central bank sells dollar and other major currencies to Nigeria commercial banks, Naira appreciates and then starts depreciating when foreign currency becomes scarce.

What is lacking so far in all the measures CBN has so far implemented to stabilize naira is inadequate application of the law of demand and supply. No government in any part of the world has been able to successfully legislate or administratively impose the law of demand and supply through price control. The CBN mandated commercial banks and Bureau de Exchange to sell dollar at a specific rate. The result is that we now have three exchange rates in Nigeria. We now have commercial bank rate, Bureau de Exchange rate and parallel market) black market rate. We now have a situation where some people are buying foreign currencies from commercial banks at lower rates and then go to the parallel market (back market) to sell them at a higher rate. This practice is called round-tripping.

Naira can never stabilize when there is round tripping. It is a market distortion which is inimical to the economy. Why will a businessman or woman buy raw materials for production when they can make a lot more money reselling the dollar and other foreign currencies they bought from CBN at a cheaper rate.

The key to Naira stabilization is for CBN to implement policies that will destroy the parallel mark (black market). This could be achieved by allowing the commercial banks to sell dollar and other foreign currencies based on the law of demand and supply. They should be no price control by the CBN. The end-result will be that supply of foreign currencies and demand will converge at some point and Naira will stabilize. CBN can occasionally intervene by selling foreign currencies to commercial banks when there is scarcity and vice versa when there is foreign currency glut. CBN should only compel commercial banks to be transparent by reporting promptly to them who bought the foreign currencies in-order to make sure the currencies were bought for legitimate purposes.

It is a welcome relief that CBN appears to be learning from their mistakes. A report is circulating in some national newspapers that CBN will require commercial banks to sell foreign currencies within 24 hours of purchase and to open foreign currency departments in all the bank branches so Nigerian’s can easily go to the banks and buy them. CBN latest policy will help in undermining the parallel since it be easier for people to walk into any commercial bank and buy foreign currencies and will not bother with the black marketers.

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