CBN’s new Forex policy leaves room for ‘Fantastic Corruption’

dollar to naira

By Ugo Nwagwu

The Central Bank of Nigeria (CBN) on Tuesday announced plans for a flexible exchange rate regime aimed at increasing foreign currency accessibility. This move had been expected and predicted by many economists for weeks. Even the Vice President Yemi Osinbajo has hinted at a rate of N285 per $1 as a guideline for oil marketers setting fuel pump prices at N145 per liter.

Addressing reporters at the end of the meeting of the Monetary Policy Committee (MPC), the CBN Governor, Mr. Godwin Emefiele said,

“In a period of stagflation, the policy options are very limited. To avoid complicating the conditions, the committee decided on the least risky option to hold. With the foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in the exchange rate policy to restore the automatic adjustment properties of the exchange rate. Consequently, all nine members voted to hold and introduce greater flexibility in managing the foreign exchange rate. The bank would however retain a small window for funding critical transactions. Details of operation of the market would be released by the bank at an appropriate time.”

Lack of Details

Perhaps just as important as what was said by the Governor, was what wasn’t said. And that is any substantial details, only speculation. The governor mentioned that details would be released at an appropriate time.

While this move was expected, the lack of details wasn’t expected and as a result, the parallel market rates remain unchanged. In fact, as of the close of the trading day, the Naira fell slightly from where it opened yesterday.

Details needed include, the interbank rate, regulation of the parallel market, plans to support new forex prices, implementation of two separate rates and most importantly what constitutes “critical transactions” and qualifies for a subsidized rate by CBN.

Therein lies the problem.

Avenues for Corruption

Financial Analysts have piled on that phrase “critical transaction” and warned that it could lead to abuse in the system. Mr. Emefiele tried to shed a little more light on this. He said,

“There are people who would want to import plant and equipment to produce goods where raw materials are almost 100 per cent available locally. We would support such attempts by people to set up factories, foreign direct investment coming in, or even local direct investment coming in, if they want to import plant and equipment and their raw materials are almost entirely available locally. We will look for an opportunity to provide the incentives that they need to import the equipment so we can produce locally and stimulate growth.”

In my opinion, this is misguided. Using a two tiered foreign exchange regime that rewards one particular group of investors at the expense of others in a country where corruption isn’t controlled is basically asking the fox to guard the hen house.

During the height of the fuel subsidy regime, there were allegations of oil marketers without depots or tank farms going through the trouble of bringing in vessels laden with fuel products and going through all the due diligence using forgery, bribery and false documents to file subsidy claims. Only to then send the cargo to neighboring countries and selling the product to the open market.

In this forex subsidy regime, what stops similar subsidy thieves from forging documents or even the prices of machinery (an example used by the governor) to obtain several millions of dollars only to sell the excess in the parallel market and make a fortune?

For example, $1m obtained at N200 per dollar would today yield a profit of N120m sold at a wholesale price of N320. This can be accomplished in minutes and requires less gravitas than bringing in cargos of fuel to docks only to then send it to Ghana.

Conclusion

I am 100% in favor of subsidizing the industrialization of Nigeria. But going about that this way is not just short sighted but it’s prone to massive amounts of sharp practices. The same goals can be accomplished through tax subsidies, public private partnerships, grants and low interest loans.

Freeing the dollar from its N197 peg is a welcome move. Freeing the dollar completely and without prejudice is the only way to operate a free market economy that is just and fair for all while limiting avenues for government officials and their friends to line their pockets even further. In other words, we need to stop giving government officials opportunities to be ‘fantastically corrupt’.