Multiple Exchange Rates.
Analyst View

Sometimes we talk about the Nigeria story and reflect on how macroeconomic fundamentals have changed over the years. We realize that, the continuous need to ease foreign exchange demand pressures and stabilize the value of the Naira has led to an evolution in the foreign exchange market; that evolution has brought us where we are today, the Multiple Exchange rate regime. 


We cannot help but point out that, following decades of experimentation with different exchange rate fixing methods, the Introduction of the Importers’ and Exporters’ Foreign Exchange (IEFX) window in 2017, brought the number of Foreign Exchange (FX) segments in the country to at least five. 


CBN’s multiple forex market segments, according to the IMF, include 

  • (i)                 the CBN official window rate of N305/$1,
  • (ii)                a retail/wholesale window rate of N325-330/$1,
  • (iii)               the I&E window rate of N360/$1,
  • (iv)               invisible transactions through Bureau De Change (BDC) and SMEs separate window rate of N360-365/$1, and
  • (v)                Some government transactions (e.g. FAAC allocations) at a rate closer to N320-325/$1.

Okay, so what has this done to/for us as an economy, one would ask. 


Speculation and Arbitrage”, said one of us. 


Unequal distribution of resources”, said another. 


The multiple exchange rate regime that we operate promotes currency speculation at the expense of real production domestically. You would see some traders who would sell dollar at a higher price in a window having accessed it at a cheaper price in another window, taking advantage of price differences in the market”

In addition, some reports have pointed that, BDCs may have graduated from merely meeting the retail requirements of travelers to becoming hard-core suppliers of foreign exchange for money laundering and trafficking purposes! … The motivation for money laundering and currency trafficking has taken root from the free access to public sector dollars made available to BDCs by CBN. Here is another report that puts more colour to the picture.


While currency speculation has led to the depreciation in Naira on several occasions, other illegal practices bypolitically exposed persons have starved the industrial and manufacturing sector of forex for raw materials, machinery and spare parts hence inhibiting potential for economy growth and development.


Evidently, the adoption of liberal dollar supply to BDCs has done much harm to the economy.


Why then has the CBN maintained such an FX regime? 


The answer is not farfetched. 


Nigeria operated a single foreign exchange market in 1987,but the CBN introduced the multiple foreign exchange policy to facilitate non-oil inflows into the Deposit Money Banks and mitigate the depreciation in the local currency.It was also introduced to alleviate pressure on foreign reserves as investors pulled out their funds from the economy. Since then, one thing has led to the other resulting to the creation of several FX segments that, although well meaning, are slowing economy growth. Our neighboring country, Ghana grows faster, and yes, they operate a flexible market-based exchange rate regime.

Of course, no two economies are the same. However, economists have always favoured a single exchange rate system over a multiple exchange regime. Former CBN Governor, Professor Charles Soludo, speaks in support of the above in this write up


Understandably, the multiple exchange rate serves as a form of tariff, tax or subsidy on certain products. 


What this means is, for example, food imports may be undertaken in an FX window with a lower exchange rate in order to make it cheaper (serving as a form of unseen subsidy), while luxury imports are only undertaken in a higher exchange rate window in order to tax people importing these goods (hence making it more expensive).


Quiet complicated, yeah? The actual implementation of tariffs and taxes would be more effective and transparent solution in solving the underlying problem in the balance of payments.


“Nigeria’s economy is growing too slowly to reduce poverty or joblessness and we urge the government to boost revenue and scrap its system of multiple exchange rates” said, the International Monetary Fund.


While we have waited for years for the rates to converge, the gap between some of these windows exceed 5% (the internationally acceptable limit).

Although initially distressing, we conclude that floating the currency is a more efficient mechanism for dealing with economic shocks. Subsequent economic shocks and depressions can always be adjusted with depreciation of the currency therefore bringing equilibrium to the foreign exchange market. However, before that, we need a more stable source of FX rather than oil revenue and FPI inflows.


Therefore, to pave the way for Nigeria to improve on economic growth, the government should earnestly work towards the implementation of the single forex market exchange rate mechanism. We will like to end this with a quote from Elvira Nabiulina, Chairwoman of Central Bank of Russia, who in an effort to stop the Russian Ruble's slide, hiked interest rates, free-floated the exchange rate, and kept a cap on inflation, thus stabilizing the financial system and boosting foreign-investor confidence


It seems to me that a market exchange rate which is not artificially controlled by central banks enables one to balance the interests of different market players - exporters and importers, investors, borrowers, lenders … a flexible exchange rate is important, and it shouldn't be artificially restrained because of the needs of the economy.” - Elvira Nabiullina