Exchange rate unification: Managing the parallel market margin

The naira is doing a last ditch battle for the elimination of the duplicitous multiple exchange rates system. Since President Bola Ahmed Tinubu ordered the unification of the exchange rates of the naira on June 14, 2023, Nigeria’s currency has suffered precipitous fluctuations due to enormous pressures from an odd combination of factors.

Those who expected instant elimination of the huge margin between the rates in the official window and the parallel market are disappointed. However, the optimism of the World Bank and President Tinubu about the gains of exchange rates unification cannot be misplaced.

The gains will soon emerge if the system is executed irreprehensibly and sufficiently monitored. Some of the gains are already being celebrated at the moment.

Even as the exchange rates of the naira fluctuates precipitously, manufacturers and service providers are already celebrating the fact that currency rates unification has provided a level playing field for stakeholders in the economy to source foreign exchange for spare parts and essential raw materials for their production.

The existence of multiple exchange rates was exploited by some corrupt officials of the Central Bank of Nigeria (CBN) for selfish gains that made life very difficult for stakeholders without close contact with them.

Very few economy operators could obtain forex for spare parts and essential raw materials at the official exchange rate which had a margin of N300 with the rate in the parallel market.

Ironically, even those with close contact with CBN officials could not get forex directly at the official rate as they had to allegedly bribe some CBN officials for the service rendered to them.

After paying the official rate of N460 to the dollar into CBN accounts, beneficiaries of the CBN largesse were given different private accounts to deposit a substantial fraction of the margin between official and parallel market rates.

The fraction of the margin sometimes amounted to N150 per dollar. If the beneficiary is allocated $10 million, he would pay N1.5 billion to the private account of the affected CBN official as the total of N150 multiplied by $10 million.

Stakeholders without contact with CBN officials lost out completely and ended up producing at higher cost because of the high cost of forex from the parallel market.

CBN officials were the primary beneficiaries of the duplicitous multiple exchange rates system. That explains why they resisted the changes solicited by the World Bank and International Monetary Fund (IMF) for unification of the exchange rates.

Even foreign direct investors were cheated and deterred by the system. They would enter the Nigerian market at the official rate of N460 only to exit at the parallel market rate of N770 thus recording losses of N310 per dollar. That was primarily what discouraged the inflow of foreign investment and made the CBN the sole supplier of funds in the forex market.

Now that the president has finally taken the bull by the horn by ordering the arduous task of unifying the exchange rates of the naira, security officials must keep close watch of the forex market and the entire banking system.

The current fluctuation of the exchange rates of the naira under the unification process is not entirely the consequence of the pressure from thousands of creditors hastening the payment of their outstanding funds.

Most of the demand pressures come from parallel market operators mopping up funds supplied to banks by CBN. Banks are collaborating with parallel market operators to mount enormous demand pressures on available forex.

The truth is that the margin between the official rates determined by interplay of market forces of demand and supply is still wide enough to tempt parallel market operators into trying something funny.

Sometimes the margin between the two rates is as high as N100 per dollar. What is happening at the moment is that parallel market operators get dollars from banks at rates N20 above what is determined by the market forces of demand and supply.

Where the rate determined by demand and supply is N760 to the dollar, parallel market operators would pay N780 to the banks and mop up millions of dollars supplied by the apex bank. That leaves genuine forex users seeking to import spare parts and raw materials waiting needlessly for forex.

Sometimes the frustration of delaying production as they wait endlessly for forex compels them to bid higher, thus mounting unnecessary pressure even on the official rate.

Banks are collaborating with parallel market operators to sustain speculative demands that exert upward pressure on the official rate.

The widening margin between the official and parallel market rates must be narrowed to the extent that it would not be attractive enough to encourage speculative bidding. The margin should not be more than N3 per dollar.

That is the best way to halt the exchange rate fluctuation currently defeating the laudable objectives of halting multiple rates.

Government can check the collaboration between parallel market operators and banks by insisting that CBN gets detailed returns on forex sold by banks.

Banks must furnish CBN with irreprehensible evidence that the forex they sold did not end up in the parallel market where it is sold at higher rates to manufacturers and service providers.

Any bank discovered to be diverting forex to parallel market operators should forfeit its allocation of forex for a reasonable period. That is the only way to knock some sense into the heads of corrupt bank directors now replacing corrupt CBN officials in the diversion of forex to speculative sources and causing exchange rate fluctuations in the process.

The current exchange rate fluctuations are causing serious concerns to foreign investors and would continue to deter them if it is not halted.

CBN cannot remain the sole source of forex in the market. That would return Nigeria to the old days of acute supply deficits and a weak naira.

The only way to allay foreign investors’ apprehension is to stabilise the exchange rate by drastically reducing the gap between official and parallel market rates.