New CBN forex policy a step in the right direction but… - By: . . | Dailytrust

New CBN forex policy a step in the right direction but…

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By Zuhumnan Dapel

 

Until recently, the Central Bank of Nigeria expended nearly half a billion dollars every month in meeting the dollar demand of Nigerians through a third-party platform: Bureau de Change operators. This is no longer sustainable as the value of the local currency (naira) against the US dollar has crashed by over 200 per cent within the space of roughly two years, prompting the apex bank to look inward in search of a radical path to redeeming the value of the naira.

The Bureau de Change agents are alleged to have played a key role in fuelling this grim situation. Motivated by this, the apex bank, effective 27 July 2021, has decided to technically end the operation of Bureau de Change in the country. Interestingly, this development is in tandem with one of the recommendations I penned down in a March 2021 opinion piece for the Daily Trust: disbanding the Bureau de Change as they have been operating under the cloak of darkness, thereby facilitating illegal financial transactions. Link to the article here.

The ban is one of the long-awaited, best, and bravest policy moves by the Central Bank in recent times. It is therefore worthy of commendation. The move will likely yield two outcomes. First, it will vanquish existing ill-driven political interest that has been thriving at the expense of the local currency (the naira), and consequently the nation’s economic progress. Second, it will unleash a wave of economic benefits for most of the population – ranging from raising the value of the naira, lowering import-induced inflation to augmenting the country’s external reserves as the shortage of forex often leaves the local currency and the economy unprotected when faced with negative blows in world oil prices.

The problem of price swings is demonstrated by the tight links between oil prices and GDP per capita. For instance, the global oil price bust of the late 1970s was followed by a long period of economic decline in Nigeria which sent GDP per capita, a rough indicator of living standards, tumbling. Following almost two decades of decline, the economy started to grow again, by about 3 per cent per year. That growth coincided with a rise in world oil prices. This implies that the country has seen no real economic progress outside of whether oil happens to be more expensive.

Also, history is replete with undisputed facts on what happens to inflation in Nigeria whenever there is depreciation in the value of the currency triggered by falling global oil prices and the shortage of external reserves to pay for imports. For instance, exchange rate and inflation in the country, since the past decade, have been moving in the same direction such that they were both at their peaks by January 2017, 18.72% and 493.28, respectively.

Worthy of note, “inflation hurts the poor rather than the rich as the rich are better able to protect themselves against, or benefit from, the effects of inflation than the poor.” The poor, the pensioners and public servants with incomes and wages not indexed to price changes are always at the receiving end of inflation. Therefore, the stability of the exchange rate will, potentially, indirectly benefit the poor in the long run as it will play a significant role in taming the ravaging effects of inflation on the welfare of low- and fixed-income earners.

One, it is one thing to design and launch a policy and it is entirely another to successfully execute the policy.  Closing the forex window for Bureau de Change is a necessary condition but not a sufficient one in shielding the currency from speculative attacks and utter collapse.

While this policy excites those wishing the country well, it is bad news for those who have been profiting from the business that has, for decades, ripped the country’s fragile financial system. There is no question that vested interests will rise in an attempt to reverse, quash, or at least render the policy infective. But if at all, they can only do so through the executive branch of the national government. At this juncture, it is crucial to mention that the independence of the Central Bank is not only indispensable in breaking the political influence link with the presidency, ensuring the steadiness of the exchange rate, and lowering inflation but essential to achieving the nation’s economic stability.

Moreover, even if the Central Bank is staffed with the world’s best professors of monetary economics and Nobel Laureates, it will remain a blunt institution in managing the economy unless it is utterly free from ill-intentioned political interferences. A politics-dominated Central Bank is often “forced to create money and renege on its commitment to price stability as many economists agree that higher Central Bank independence yields lower inflation.”

Therefore, a certain degree of autonomy can shield the bank from any undue political interference otherwise politicians (instead of trained central bankers) will be the ones pulling switches and moving levers at the helm of the bank. It is important to point out that a high turnover rate of central bank governors – the rate at which central bank governors are replaced – is a signal of low central bank independence.

The Central Bank must plug potential holes otherwise, as the bank transfers dollars to commercial banks, some of the dollars will fall through the gaps and find their way, through the underground economy, to Bureau de Change and interested individuals. It is therefore not enough for the Central Bank to end the supply of dollars to the Bureau de Change. One way to counter this potential shortcoming is to criminalise the buying and selling of foreign currencies in the country except through commercial banks and their authorised outlets.

Finally, it is hoped that this ban will outlive the current political dispensation and successive future governments of the country.

 

Dapel can be reached at: zdapel001@dundee.ac.uk