Open Plea to Sanusi Lamido Sanusi (SLS) 2
In order to bolster my arguments towards a rethink on our exchange rate mechanism, I visited the latest CBN's website and to my amazement, I discovered the genealogy of that process which is in line with what I thought it was. Also today, an article by John Hilsenrath in today's Wall Street Journal ( Monday, February 22, 2010) about a rethink in American economy stated, ÔÇśMany of the things economists thought they knew turned out to be wrong, ...in the wake of the financial crisis.' Up till date, economists have not been able to explain the core cause of The Great Depression of the 1930s. This is one more reason why something as important as the exchange rate mechanism, which has spun the fortune of Nigeria into dizziness, should be brought to the proposal table for a debate. The problem is whether the economists themselves believe that the exchange rate mechanism has a great bearing on the economy of the country.
From the latest update of the Central Bank of Nigeria's (CBN) website on the genealogy of exchange rate mechanisms in Nigeria (reproduced below) it is clear that the focus at CBN has never been the economic growth of the country. Rather, it has consistently - since September 26, 1986 - been about the stability of the exchange rate mechanism, but the price has been too colossal. The large army of those in Diaspora; increasing number of shutdown factories; dwindling buying power of the citizens; down slope in agricultural production, decaying infrastructure, low quality in education and health, lack of constant power supply, etc, stemmed from the wrong turn we, as a country, took on September 26, 1986. Below are the excerpts from the CBN website:
"Foreign Exchange Management Before 1986
Before 1986, importers and exporters of non-oil commodities were required to get appropriate licences from the Federal Ministry of Commerce before they could participate in the foreign exchange market. Generally, import procedures followed the international standard of opening of letters of credit (L/Cs) and subsequent confirmation by correspondent banks abroad. The use of Form 'M' was introduced in 1979 when the Comprehensive Import Supervision Scheme (CISS) was put in place to guard against sharp import practices. The authorization of foreign exchange disbursement was a shared responsibility between the Federal Ministry of Finance and the CBN. The Federal Ministry of Finance had responsibility for public sector applications, while the Bank allocated foreign exchange in respect of private sector applications.
Increased emphasis was placed on export promotion as a means of reducing pressure on the external sector. The government introduced a number of incentives to boost non-oil exports. These included arrangements for setting up export free zones, concessions to exporters to retain 25 per cent of their export proceeds, the liberalisation of export and import licensing procedures and the provision for the establishment of an export credit guarantee and insurance scheme. Exchange control was discarded on September 26, 1986 in order to evolve an exchange rate mechanism that would better reflect the underlining macroeconomic realities."
"Foreign Exchange Management Since 1986
The Second-tier Foreign Exchange Market (SFEM) came into being on September 26, 1986 when the determination of the Naira exchange rate was made to reflect market forces. The modalities for the management of the Foreign Exchange Market have changed substantially since the introduction of SFEM, in line with the principles of the Structural Adjustment Programme (SAP) which emphasise the market-oriented approach to price determination.
Within the basic framework of market determination of the Naira exchange rate, various methods were applied and some adjustments carried out to fine-tune the system. A transitory dual exchange rate system (first and second-tier) was adopted in September, 1986. On 2nd July 1987, the first and second-tier markets were merged into an enlarged Foreign Exchange Market (FEM). Various pricing methods, such as marginal, weighted average and Dutch system, were adopted. With the introduction of the SFEM, the Federal Ministry of Finance had its allocative powers transferred to the CBN, but it retained approving powers on public sector transactions.
The constant fine-tuning of the market culminated in the complete floating of the naira on March 5, 1992 when the system of pre-determined quotas was discontinued. The unabating pressure on the foreign exchange market resulted in the policy reversal in 1994. The reversal of policy in 1995 to that of "guided deregulation" necessitated the institution of the Autonomous Foreign Exchange Market (AFEM). Apart from the institution of an appropriate mechanism for exchange rate determination, other measures increasingly applied in managing Nigeria's foreign exchange resources included demand management and supply side policies. The CBN and the government have actively fostered the development of institutions such as the Nigerian Export Promotion Council (NEPC) and the Nigerian Export-Import Bank (NEXIM) in the drive to earn more foreign exchange.
The AFEM metamorphosed into a daily, two-way quote Inter-Bank Foreign Exchange Market (IFEM) on October 25, 1999. The IFEM is expected to broaden and deepen the foreign exchange market on daily basis and discourage speculative activities."
Now then, why will anybody leave such a vital component of an economy to auctioning (DAS or WDAS), knowing full well that those with cheap money (patronage of inflated contracts) will at whims always distort that process? I wonder what would happen if the developed economies have let market forces determine the interest rates of their various economies. Our Economy Monitoring Unit pronouncements on interest rate seem a joke because of the hidden distortion in the exchange rate mechanism. By the way, I think until the insurance industry becomes the major depositor in our banks, government whose through legislation made their premium possible, will not through the EMU be able to enforce the interest rate pronouncements. Right now, major deposits in our banks are not the product of legislation; therefore, individuals will continue to dictate what they want in return for their money. Too many banks also will negate a control of interest rate because of number of choice. Government can also move all tax money to the banks instead of the central banks and asks for a reduced interest rate. As the majority depositor, government through EMU will then be able to enforce their interest rate pronouncements.
Samuel Akinyele Caulcrick,