Rates unification and imperative for functional FX market

BY STEVE MORKA

Steve Morka is a former banker and financial analyst and he

contributed this piece from Lagos.

When President Bola Tinubu announced his plan to see a unified exchange rate, the whole country including the international financial community applauded this announcement. To put this into effect, on 14 June 2023, the Central bank of Nigeria (CBN) followed up with a circular to all banks on changes to operations in the Nigerian Foreign Exchange (FX) Market. According to the statement, the CBN will be “reintroducing the ‘Willing Buyer, Willing Seller’ model at the I&E window, where all eligible transactions can access foreign exchange at their preferred rates”.

Since the release of this circular, the actions of the CBN have been completely at variance with the establishment of a foreign exchange market where the forces of demand and supply, and by implication the willing buyer, willing seller model is allowed to operate. The CBN will appear to be struggling from transiting from the allocation model to a market-based model.

The CBN calling banks to submit bids and placing a cap on rates to bid negates the concept of market forces, as this will only result in multiple exchange rates as evidenced in the wide gap already established between the I&E market and the CBN intervention rates. One is not unmindful of the challenges the apex bank is grappling with on the supply side and the settlement of committed forward sales which are still outstanding, nevertheless, this allocation approach will not help the situation, rather it will only create multiple prices in the market which is contrary to the objective of the foreign exchange rate unification.

The CBN circular on wholesale intervention of July 24, 2023, is the latest action of the CBN that is bound to create further distortions in the forex market. The circular which categorised banks based on Shareholders’ Funds for the purpose of the maximum amount the banks can bid will destroy efficiency and competition in the financial system. The six banks with shareholders’ funds of N350 billion and above who can individually bid for 12 percent maximum will jointly control 72 percent of the amount offered by the CBN, not because of efficiency or any market dynamics, but by the special grace of CBN categorisation.

What does the CBN plan to achieve with this categorisation? Is this the way to create an efficient forex market? Is this the way to achieve a unified exchange rate? Is this the way to improve the efficiency of the financial system? Certainly not, as this same model was tried in the late 1980s and it failed woefully and had to be discarded after a few weeks of operation. This failed experiment is what the CBN is recycling after over 30 years! Shouldn’t we be moving forward and embracing a market economy as stated by the president?

Why is the CBN not allowing customers to choose the bank they want to deal with? Why are they pushing customers to certain banks, irrespective of their efficiency, pricing, and other service and product offerings? The CBN can learn from Ghana, and Kenya, two countries having similar foreign exchange challenges. These countries still have a system where there exists a single rate plus or minus a few percentage points.

This is the time to enthrone a foreign exchange market where the interplay of market forces should dictate the exchange rate. CBN as a player in the market can influence the rate by its active participation in the buying and selling process. Any form of CBN allocations, preferential allotments, categorisation of banks, CBN determination of exchange rates by fiat should stop. The foreign exchange market should be established and allowed to operate in a transparent and efficient manner where all the players should participate on equal basis without any one or group being favoured. Unification of exchange rates using market forces is the direction to go.