The Guardian Editorial
First Published on: March 08, 2006

The Central Bank of Nigeria has kept its word. When government adopted the National Economic Empowerment Development Strategy (NEEDS) programme in 2004, it undertook therein to "continue with the retail Dutch Auction System (DAS) in the determination of the nominal exchange rate regime and adopt a wholesale Dutch Auction (WDAS) in the medium to long term". The Central Bank subsequently held aloft participation in WDAS as prize for major banks that are able to raise their capital base beyond the set minimum mark of N25 billion by year-end 2005. With the recent disclosure by the apex bank that "there is still no big bank in Nigeria", it is understandable that all successfully consolidated banks have been given the prize and can participate in WDAS.

NEEDS was promoted as an original and home-grown poverty reduction strategy paper. Today, the official revelation that adoption of WDAS was an IMF conditionality for Nigeria's Paris Club debt exit treatment raises questions as to the true authorship of NEEDS. The exchange rate exerts critical influence on economic performance. Hence the real concern should be to ascertain whether WDAS is appropriate for producing a realistic naira exchange rate that would uplift the economy. The outline of the process of arriving at a unique or different naira exchange rates under WDAS can be easily sketched.

First, Central Bank takes possession of public sector dollar revenue thereby controlling some 95 per cent of the country's available foreign exchange. Using an administratively set dollar revenue conversion to naira exchange rate, the Central Bank substitutes naira obtained through additional printing of money (ways and means advances) or borrowings from the banking system (via treasury bills, etc), a step which, we must stress, implies commensurate deficit financing. Second, Central Bank sells a fraction of the seized foreign exchange via a Dutch auction at a profit. Successful participating dealer banks pay variable bid rates (representing variable devaluing of the naira beyond the revenue conversion rate) whose weighted mean provides the WDAS naira rate. And third, deposit money banks retail foreign exchange to end-users at varying rates or profit margins resulting in further varying devaluing of the naira.

We may briefly review some implications. One, contrary to claims that WDAS is a macro-level activity, under the new system as it had been under retail DAS, the Central Bank remains engrossed in micro-level currency trading analogous to a sole importer distributing wholesale a foreign principal's products locally. That action runs counter to the core mandate of the apex bank and Central Bank is specifically prohibited from engaging in such trading by the CBN Act both in its pristine form and as amended. Two, the Central Bank's monopoly position, its right to reject bids that it alone deems unrealistic and the prior administratively fixed dollar revenue conversion rate (below which Dutch auction rates cannot fall), show that the WDAS naira rate, far from being a market determined rate as stated by Central Bank, is a regulated one, that is "an exchange rate determined by public policy (which) is not in the interest of consumers (read economy)", to use the words of Central Bank Deputy Governor Obadiah Mailafia.

Three, WDAS simply transforms banks from equanimous agents (that ordinarily earn commission from clients) into ensconced distributors of foreign exchange whose survival in business where profits are maximised, coincides with committedly scheming the devaluation of the naira through raising the price of foreign exchange. When it is recalled that businesses requiring foreign exchange for genuine production tend to seek progressive lowering of its price, it becomes clear that WDAS (like DAS before it) works at cross-purposes with national economic interest.

We cannot overemphasise this aspect relating to competitive production. Where the productive sector has asphyxiated over the years with Central Bank as the sole interloper between public sector holders and economic end-users of foreign exchange, the sector will now be bled by two officially recognised interlopers, the Central Bank and deposit money banks separately. Both interlopers in the context of WDAS add no value but act as significant production cost enhancers. WDAS would therefore compound the uncompetitiveness of the economy and make Nigeria less and less attractive as investment destination. Let it also be noted that under WDAS, some of the covert abuses of foreign exchange perpetrated by banks under retail DAS can stand open parade and banks may go the whole hog and "transparently" package them as new banking products all at the expense of the economy.

But then Mailafia's totally false assertion that emerging world and advanced economies have all moved from retail DAS to WDAS reeks of a rehearsed mission by Central Bank to deceive Nigerians. Included in the wishful bouquet of benefits that Central Bank has pinned on the new system is that WDAS would liberalise the foreign exchange market as well as harmonise the naira exchange rate whereas WDAS as already observed represents tightened regulation and formal lengthening of the foreign exchange supply chain and setting the stage for exploitative foreign exchange rates. Though WDAS is being promoted as the tool for redeeming government's promise to eliminate the then dual naira exchange rates, the new system would spawn instead three distinct naira exchange rates, namely the dollar revenue conversion to naira rate set by fiat, the weighted WDAS naira rate at which deposit money banks (now licensed major distributors of foreign exchange) obtain hard currency and the weighted end-user naira rate at which banks would dispense foreign exchange.

We advised government, after it had committed itself to parting with $12 billion on the Paris Club rather than investing the funds in the domestic economy, to go for straight debt exit and to ward off possible recolonisation of the country. With WDAS reinforcing the decades-old economic difficulties, the system's conditionality-induced medium to long term implementation would leave the Nigerian economy perpetually weakened and manipulable by IMF and neo-colonial Western interests. WDAS should therefore be thrown out outright.

We have long advocated that adopting a liberalised foreign exchange market system would evolve a harmonised and realistic market determined naira exchange rate to revive the economy. What it involves is for public and private sector foreign exchange (meant for conversion into naira) to be made available in the first instance directly to genuine and economic end-users with the financial institutions acting as commission-earning intermediaries instead of price-dictating interlopers. All focused economies employ the above approach or very similar methods.

The approach eliminates excess liquidity, high inflation and all the other monetary management problems enumerated by the Central Bank Governor when he insisted on lowered oil price peg for the 2006 budget at the Senate. In place of the continued stacking abroad of huge and idle foreign reserves which WDAS would foster, through the above approach government can invest domestically (and the economy can productively absorb) in the key areas crying for attention all current and increased oil earnings. That would facilitate a private sector-driven economy in which Nigerian businesses in their millions and not just a few foreign direct investors flourish. This is the route to rapidly grow the economy and for Nigeria to achieve in real terms the high growth rates that government is wont to conjure.