1. Introduction
Recent developments in the foreign exchange market in particular, and the overall economy in general, have prompted my writing this article on how to reduce the volatility in the value of the Naira. Exchange rate fluctuations rather than its level, cause more uncertainty in the market place. If exchange rate is stable, businesses can make inventory replacement plans based on that rate. But businesses and households will find it very challenging to make future plans when they cannot predict what the rate will be even within a business cycle of say three months, assuming that it takes that length of time to originate an import transaction and conclude it.
The Tinubu Administration in June 2023, deregulated some sectors of our economic activities, one of them, is the merging of the previously fragmented foreign exchange market. The various exchange rates in the segmented markets were collapsed into a single floating rate of the Naira.
A new window called the Nigerian Autonomous Foreign Exchange Market(NAFEM) was created to replace the Investors and Exporters(I&E) window of the CBN.
The difference between the I&E window and NAFEM has to do in my opinion, with the degree of the CBN intervention in the foreign exchange market. Under the I&E market arrangement, the CBN was involved both in providing the necessary liquidity and also in rate determination. While in the NAFEM structure, the CBN is expected to play little or no role in the foreign exchange market. NAFEM is expected to be driven by the private participants in the foreign exchange market who make decisions based on expected returns and risks under the framework of a willing buyer, willing seller contractual arrangements.
The introduction of the single floating rate is expected to stabilize the exchange rate, reduce Naira volatility and eliminate the arbitrage profit that exists between the official and black market rates that fuels speculation in the foreign exchange market. President Tinubu in a recent statement at the Germany and Nigeria Business Group, informed the audience that his administration has eliminated the arbitrage premium simply, by introducing the single floating rate as part of his economic deregulation policy that is aimed at making Nigerian business environment attractive to foreign investors. The validity of this statement by Mr. President has been difficult to establish because, the arbitrage premium is seen to be bigger now after the merging of the rates than before the merger.
A new CBN Governor Mr. Olayemi Cardoso and his team were appointed to replace the Emefiele administration at the CBN while the deregulation of the foreign exchange market was already in progress.
Governor Cardoso made his inaugural statement outlining his vision for the CBN and the roadmap to achieving his set goals. He reemphasize the Tinubu government policy of economic deregulation and expressed his desire to see the foreign exchange market function with minimum CBN participation. Governor Cardoso said that the CBN will periodically, provide liquidity to the market and exit when there is stability. In addition, he said that the appropriate method to manage the exchange rate was still being worked out.
Governor Cardoso recently at the Chartered Institute of Bankers of Nigeria (CIBN) annual dinner held on 24th November, 2023, in his Keynote Address, did not say exactly how the CBN will stabilize the exchange rate and reduce the Naira volatility. Although, he did recognize the uncertainty in the foreign exchange market
because of the volatile exchange rate and its implications for business decision making.
The introduction of the single floating rate of the Naira has caused a frenzy/heightened level of uncertainty in the foreign exchange market and the CBN is yet, to come out with a comprehensive approach to stabilizing the exchange rate and reduce volatility in Naira value. The aim of this article therefore, is to suggest a strategy on how to stabilize the exchange rate and reduce volatility in Naira within the market deregulation framework of both the CBN and Tinubu administration.
2. Current Situation In The Foreign Exchange Market
After the introduction of the single floating rate, the Naira has lost more value than before the deregulation. The gap between the official rate as represented by the NAFEM rate and the black market rate has widened. To establish this fact, I picked 16th June 2023 being a date before the deregulation of the foreign exchange market and another date 24th November 2023 representing a date many months after the deregulation. On 16th June, the I&E rate=N686.96/$1 and Black market rate=N760/$1. Arbitrage profit as at 16th June=N70.04./$1. On 24th November, the NAFEM rate=N795.89/$1 and the Black market rate=N1,160/$1. Arbitrage profit is N365.11/$1. (Source: Nairametriics.com and FMDQ Group). The arbitrage profit that exits in the market as at 24th November 2023 is more than five times what it was before deregulation on 16th June 2023. These were the statistics that made it difficult for me to validate President Tinubu’s assertion that the arbitrage profit has been eliminated in the foreign exchange market. The President made that statement based on the information given to him. We know that whenever a president of any country including that of Nigeria, makes a pronouncement, it sends a wave throughout the democratic economy and international communities because people listen. To make my point clear, am not saying that the president is wrong only that I could not validate his statement. It is left for his advisers to tell us the basis of the assertion.
The existence of this wide margin between the NAFEM rate and the black market rate still creates opportunity for arbitrage profit even though, the CBN is currently, not providing liquidity to the market.
This wide spread between the official dollar and black market dollar will continue to fuel speculation in the foreign exchange market thereby, causing greater volatility in the value of the Naira.
Some people may wonder why we should be concerned with the spread between NAFEM and black market rates when the CBN is not providing liquidity to the market. After all, NAFEM is funded from autonomous sources and rates are determined by interbank transactions. Well, apart from the negative macro-economic effects of unstable exchange rate and high volatility of the value of the Naira, we should be concerned with the spread because, the CBN is still funding the Federal government of Nigeria (FGN) at the weighted average of the preceding day’s NAFEM rates. This rate is close to or is derived from the NAFEM rates, hence, the rate at which FGN obtains its dollars from the CBN is still far lower than the black market rate. FGN being a major consumer of foreign exchange , this spread will further, fuel speculation and instability in the exchange rate of the Naira.
The likely scenario that will play out is that, those corrupt government officials who award dollar denominated contracts would inflate the cost of those contracts and take the excess dollars from such illegal transactions back to the black market and share the premium with their unscrupulous government approved contractors. The contractor can even make profit without executing the job by selling the dollar value of the contract at the black market where the rate is higher than the NAFEM rate used in consummating the deal.
Similarly, state governors desirous of making quick money in preparation for the next elections, would like to raise off-shore dollar denominated loans and have them converted at the NAFEM rate.
They will turn around and channel the dollars to the black market and pocket the premium. There were allegations of such practices against some governors during the President Buhari administration.
The introduction of the single floating exchange rate of the Naira has caused greater instability in the exchange rate of the Naira. It has made it more difficult for market participants to form realistic expectations about the future trend in the value of the Naira thus, introducing greater uncertainty and speculation in the foreign exchange market.
3. Current Situation In The Economy/Country
The deregulation of the economy and subsequent introduction of the single floating exchange rate of the Naira, have created distortions not only in the foreign exchange market, but in the entire economic system. There is no aspect of our economic life that has not been affected. The reason being the significant impact of changes in the exchange rate on prices, inflation, investment, output, employment, interest rate etc. For those readers who may want to empirically establish the validity of the correlation between exchange rate and some macro-economic variables as stated above, a simple regression analysis will do that. In Nigeria, foreign exchange rate has more impact on prices than the effects of money supply because of the large foreign sector of the nation’s economy. When it comes to the impact of money supply on macro- economic activities, neither acceleration nor deceleration of money stock is expected to have a more pronounced impact on prices than the exchange rate.
In the USA, the reverse is the case because of the small size of its foreign sector, where exchange rate is expected to have a minimal effect on prices and the entire economy. The reason being that the USA economy, depends on endogenous or internally induced consumption spending, where either acceleration or deceleration of money stock will have significant impact by altering the expenditure behaviors of the various economic units.
In Nigeria, mere announcement (announcement effect) of a rise in exchange rate will send such vibration in the market place that prices will almost rise instantaneously. The woman tomatoes seller, crayfish and vegetable sellers will immediately, adjust prices upward without even, waiting for the real effects of the exchange rate increase to set-in probably during inventory refinancing or restocking. If you happen to ask these petty traders why the sudden increase in price when those items are gotten locally with no foreign exchange component. The response will be that, they need to buy imported other food items like tin tomatoes, vegetable oil etc, hence, they have to correctly price their own products based on expectations of future trend in Naira value to enable them, purchase those items at the expected higher domestic prices. Price fluctuations affect asset prices which in turn, affect the expected returns and risks associated with various asset classes. These variabilities in returns and risks measurements such as variances and standard deviations will create difficulty in asset allocation decisions.
The main effect of Naira volatility therefore , is the uncertainty it introduces in the market thus making it difficult for people to form expectations about the realistic future value of the Naira. Most people would rather, engage in speculative activities which induce further volatility in Naira value than take the risk of bringing goods and services.
I will demonstrate how the volatility in Naira value will affect asset prices and repricing. Also, how such volatility in Naira value will affect the ability of firms and households to optimally, allocate their scarce resources among competing asset classes under conditions of uncertainty brought about by the unstable Naira exchange rate.
For ease of understanding, I will decompose the economy into four main markets namely; Capital, Labor, Financial and Output. It is assumed that only two factors namely: capital and labor are used in production while holding technology and method of production constant.
I can now illustrate how the volatility in Naira value or unstable exchange rate will affect asset prices and asset allocation decisions in those markets. However, before I proceed, it is necessary to highlight the fact that the exchange rate the market participants incorporate or use in making pricing decisions is the black market rate and not the NAFEM rate. The black market rate therefore, is the reference rate used for diaspora remittances, importation of goods and services, money laundering and even by corrupt officials who may want to either take out money or repatriate their loots.
This is how it works. As stated before, most of the foreign exchange obtained at the official rate, end up in the black market because of round tripping. If those foreign exchange allocated by the CBN were actually utilized to import goods and services, domestic prices of goods would have reflected that rate and prices would not have been as high and volatile. What prevails most of the time, is that, a small fraction of the CBN dollar is used to bring in goods while a large percentage, is channeled into the black market. The bulk of the imported items are funded from the black market and this rate, is what is used in pricing.
The introduction of the single floating exchange rate of the Naira has caused significant depreciation in the value of the Naira and the attendant volatility due to the instability in the exchange rate.
This depreciation in Naira value, will affect consumption, investment and savings decisions by the participants in those four markets.
1. Capital Goods Market
Capital goods are those equipment and machinery that are used in production. Their accumulation over time, known as capital formation, will determine the ability of a country to produce goods both now and in the future. Firms acquire capital goods through investment spending. If the price of a capital asset goes up due to changes in exchange rate, it is going to affect the marginal production cost(MPC). Firms exist primarily, to make profit and as the marginal production cost rises, corporate managers will be looking at the marginal efficiency of capital otherwise, known as return on investment(ROI) to make decisions on either acquisition of new equipment or replacement of old ones including spare parts. These Capital goods come primarily from abroad. You see most firms being very reluctant to make investments due to the uncertainty in the foreign exchange market as to Naira value. Most of the firms namely: the multinational companies will tend to adjust their asset portfolios by holding dollars as a hedge, postpone further investment or may consider the business environment as unfriendly which may trigger an exit decision. I was told that Guinness Brewery Nigeria Ltd is planning to leave the country. The uncertainty in the value of the Naira is likely to have depressing effects on the economy.
2. Labour Market
The labor market is where workers that are desirous to offer their human energies, skills and services in exchange for compensation which will include among others: wages and other benefits come together with those that need the services. The worker is the supplier of labor and the individual or organization seeking for such services is the demander of labor. The worker goes to the labor market or work place with the expectation of making enough income to enable him/her, meet his or her needs. The worker is conscious of the ability of that income level to continuously, sustain both current and future consumptions hence, he or she is so much after the real wage rate relative to the nominal wage rate.
When the Naira is so volatile as a result of fluctuations in the exchange rate, it induces a rise in the general price level. At that point, the worker’s real disposable income will decline and the same nominal wage can no longer purchase the same basket of goods that it used to before the exchange rate induced inflation. At this point, the worker is exposed to purchasing power risk due to inflation that is caused by Naira exchange rate depreciation.
The quality of life or living standard of the worker will go down at that point as his or her consumption expenditures will decline because of a fall in real disposable income. Organized labor will start agitating for wage increase. They may even threaten strike and other anti-work measures. We have heard recent pronouncements by the Nigerian Labor Congress(NLC) calling for strike action. Where employers agree to increase the wage rate or incorporate it in the contact agreement as an inflation/cost of living adjustment index, it may lead to a reduction in labor force through layoffs and a subsequent increase in the unemployment rate. Firms also expecting a down turn in the economy due to a reduction in investment spending may find it difficult to pay the newly negotiated wages. Some workers may even experience a high level of marginal disutility of labor or dissatisfaction due to a decline in real wage rate that they may, decide to opt out completely from the labor market . These types of decisions in the labor market may likely increase the rate of unemployment. On the other hand, those skilled labor, whose wage rate-output ratio is high, may consider leaving the country to seek employment opportunities elsewhere. The resultant brain drain phenomenon, may negatively affect the economy. The overall effect of Naira volatility on the labor market is a contraction of the economy due to possible shot down and high unemployment.
3. Financial Market
Financial market is where financial assets of different maturities which represent the claim of one economic unit against the other are traded. These financial assets are claims on real assets of the issuers. They include cash, bank deposits, savings account, stocks, bonds, certificate of deposit (CD), mortgages , Real Estate Investment Trusts (REIT) , Equity Traded Funds (ETF) etc. Volatility in Naira value affects prices and risk/return profiles of these asset classes and investors have to make asset allocation decisions under conditions of uncertainty or severe stress. Firms and households therefore, have to make decisions on how to allocate their scarce resources between these competing asset classes. How much is allocated to a particular asset class, is govern by risk and return considerations, the investor’s goals-income versus growth, wealth level-high, medium and low income, the capitalization category of the company that is, whether the company is high cap, med cap and low cap company, the nature of the company’s business whether financial or non financial organization. The liquidity preferences of the decision makers will also play a role in asset allocation decisions. Naira volatility induced rise in prices or inflation will cause a decline in real values of some of those assets especially the fixed income securities. For low to medium income investors or households who most often, prefer assets that argument current income and hold their assets in more liquid assets like savings accounts and CDs, fluctuations in asset prices may reduce the purchasing power of their capital and returns thereby affecting their quality of life. The high income investors who most often, have a longer term investment horizon by holding equities and alternative asset classes may decide to alter their asset allocation decisions by moving into international asset classes relative to domestic asset classes. Institutional investors like Pension Funds will be more concerned about the safety of those investments especially public equities because, they do not really know their true financial conditions as the financial statements, may not give a true and accurate financial health of those firms. These Institutional investors may decide to alter their asset allocation in favor of government securities like Treasury bills and bonds. Financial institutions especially banks, should be very concerned with asset allocation under this stressful environment. In particular, they should be concerned about the quality of risk assets in their portfolios. The operating environment may impair the ability of their clients to meet the loan terms and obligations thus, increase the probability of default. Governor Cardoso during that CIBN dinner, told his audience that CBN has conducted stress tests on these banks and that the financial system stability is okay right now. Well, that is good news. However, such tests should be conducted more often as the financial health of these banks can change anytime due to the deteriorating conditions of the makers of those notes underlying those risk assets. Failure of banks now is going to have a systemic effect on the financial system. Firms and households liquidity preferences also may likely, tilt toward holding most of their wealth or income in dollars. That is probably what is happening in the country now as dollar, is now a preferred currency over the Naira and serves as a quasi legal tender in Nigeria. These dollars most often, are held in foreign financial institutions or off-shore assets like US stocks and Eurobonds. These actions constitute what is called capital flight and they limit the ability of the economy to grow. Asset managers, seeing the uncertainty in the market, will start questioning the ability of the issuers of those financial assets to redeem them at maturity. This lack of confidence in the market due to Naira volatility may cause both corporate and individuals to switch their portfolios towards holding real assets like land, real estate properties, gold etc. Future contracts especially, those dollar denominated
transactions maybe difficult to execute as there will be doubt in the minds of the contracting parties as to the ability of the makers of such instruments to redeem them at maturity. We were told by the CBN Governor Mr. Cardoso that the CBN has a backlog of such commitments that the current management inherited from the Emefiele administration. Naira volatility and the accompanying fluctuations in asset prices and risks will shift asset allocation decisions toward safety and capital protection. There will be also portfolio rebalancing especially as regards to weights given to various asset classes as the market conditions change together with investors’ psychology. These weights will be predicated on more frequent asset class analysis, market analysis and individual investor’s analysis and judgment as the market conditions unfold. The overall effect of Naira volatility on asset allocation decisions is to increase uncertainty and difficulty in decision making thereby affecting the growth potential of the economy.
4. Output Market
Output market is made up of domestic produced goods and imported goods from abroad. It is where physical goods and services are exchanged based on agreed prices between the buyers and sellers. Price reflects preferences, values and the utility of the products of exchange to the participants in the transaction.
Naira volatility as demonstrated in the previous sections in this article has affected investment decisions thus, reducing domestic production of goods. Similarly, due to high and volatile exchange rate, importers have problems in bringing goods from abroad because, the capital requirement to import the same quantity of goods has gone up as a result of a depreciation in exchange rate. The volatility in Naira value also compounds the problem by making it difficult for importers to price their goods because they do not even know what the exchange rate will be at reordering or restocking point. Even to figure out what the replacement cost of those inventories would be is difficult because of the high degree of uncertainty associated with the future value of the Naira exchange rate. The effect of this exchange rate induced inflation is to reduce the volume of output brought to the market place. This contraction in the quantity of goods available, will create further inflation and scarcity which can be seen when you go to supermarkets to buy things. The overall effect of shortage of goods, especially the essential ones that are needed to sustain life is a decline in quality of life of Nigerians. You can see traces of hardship on the faces of Nigerians irrespective of tribe or religion. People are suffering and complaining a loud which Tinubu government should pay attention and attempt to provide possible solutions. Such situations are fault lines of social implosion.
4. Strategy To Reduce Naira Volatility
The recent deregulation of the foreign exchange market and the introduction of the single floating rate of the Naira exchange rate, have caused more uncertainty in the ability of market participants, to form realistic expectations about the future trend in the value of the Naira.
This uncertainty, has affected business planning, asset choices, asset pricing, portfolio re-alignment, re-balancing, re-setting and switching.
The question that is begging for an answer before us, is how do we restore confidence in the foreign exchange market and in the process, bring back the economy on the path of gradual progression?
The CBN Governor Cardoso and his team have a major role to play in this regard.
I was made to understand that the CBN has not been funding the NAFEM and has also not been involved in rate determination as rates are determined by interbank negotiations.
Ideally, that is what it is suppose to be for the CBN to stand a loaf and with minimum interference, watch the market as it is assumed under the neoliberal economic thought, to possess the internal mechanism to restore balance whenever it is out of balance or equilibrium.
Well, no market operates without guidance. It is therefore, necessary at this point for us to understand the difference between Deregulation Economics and Laissez faire Economics. Under market deregulation, attempts are made to either remove completely or reduce to the barest minimum, the obstacles that inhibit the efficient and effective functioning of the market. Government or the supervising authorities do not take off their eyes on what is going on in the market place because of individual self interest that is driven by greed. On the other hand, Laissez faire economics means that in the market place, participants are at liberty to do whatever they like. We all know, that Laissez faire cannot work either here in Nigeria or elsewhere in the world because it could lead to market failure with serious consequences for the nation.
Now, this is my prescription of what the CBN should do to reduce volatility in the value of the Naira.
The CBN should immediately , intervene in the NAFEM by providing liquidity to the market. In addition, they should be involved in rate determination. Please note that I did not say rate fixing. CBN should reintroduce the old bidding system of two-way quotes. Dealers should submit at the time of bidding, their buying and selling rates. The CBN should use the black market rate as a reference rate. The previous day’s black market rate is adjusted downwards by allowing for say N2 to take care of transaction cost plus little profit to buyers of CBN dollar. This strategy will automatically, take away or reduce the spread between the NAFEM rate and the black market rate to the barest minimum. This NAFEM adjusted rate, should be the only rate prevailing in the market and all consumers of foreign exchange including government, should buy at the same rate. The initial reaction of the speculators would be to push the black market rate further up in anticipation that pressure will be on the CBN by the Executive Arm to give up such a policy. Under this deregulated foreign exchange market, the onus is on the CBN to continuously, match the black market rate thereby, removing or reducing the spread. Overtime, it will be done on every market participant that only one rate prevails in the market as the premium, that used to go the speculators has now gone to the CBN instead of speculators. If this rate intervention strategy is coupled with increase in liquidity, the volatility in Naira value will be highly reduced together with uncertainty about future trend in Naira exchange rate. Confidence probably, will gradually come back as firms and households can now plan their businesses based on a relatively stable Naira value.
In a recent CBN Circular, I read where the CBN has directed DMBs to sell BTA, PTA, to end users and also remit medical and school fees of Nigerians going for medical treatment abroad and those studying at higher institutions overseas. By the way, this new policy , will make BDC operators to ask for admission into the NAFEM. The applicable exchange rate accordingly to the Circular, should be about 20% higher than the NAFEM rate on the day of the transaction.
We can see that under this Governor Cardoso CBN regime, we have the government rate, the interbank rate and now the BTA, PTA rates. It appears we are gradually shifting back to the multiple exchange rates regime. Governor Cardoso should not succumb to pressure from any quarters, should stay the course and do not have to waver. After all, the people that go for overseas treatment, send their wards abroad to school and collect all sorts of travel allowances are the rich and they should be ready and capable of paying the new adjusted black market rate as suggested in this article. The rich are the most likely to benefit from this new rate that the CBN has introduced. It will add little or no value to the life of the ordinary Nigerian. Rather, it will create distortion in the foreign exchange market as non travelers in collaboration with DMBs will use fake traveling documents to obtain BTAs, PTAs etc and channel back to the black market, sell at the black market rate and share the resultant arbitrage profit. Honestly, we do not need any type of multiple exchange rates again as it will defeat the goal of the single floating rate and deregulation policy. Anybody that wants foreign exchange if my strategy is adopted, will purchase at the same rate irrespective of purpose for use or status. To eliminate the premium which fuels speculation in the market is for the CBN to increase funding the market, but this time around also, sell CBN dollar using the black market rate as the reference rate. There should be only one rate prevailing in the foreign exchange market whether it is called black market rate or adjusted NAFEM rate is irrelevant so far as, there is no longer premium in the market to fuel speculation.
However, it is pertinent to note that no monetary policy measures will solve the exchange rate depreciation and Naira volatility without an increase in supply of foreign exchange in the market.
The strategy recommended here to reduce Naira volatility and stabilize the exchange rate is more of a demand management strategy.
Government also has a critical role to play in reducing Naira volatility by ensuring proper coordination between fiscal and monetary policies. Government will do that by addressing the problem of corruption which is a major source of illegal funds that go through the foreign exchange market. Government expenditure programs at all levels should also be trimmed down to avoid overheating the financial system especially the foreign exchange market.
Some critics of this Naira Volatility Reduction Strategy(NVRS) will say that a government, should not use the rate in the informal, unrecognized, unregulated and illegal segment of the foreign exchange market known as the black market as a reference rate on which the CBN foreign exchange policy should be based upon. That such a policy approach, will portray Nigeria before international community as a country that encourages illegal financial flows by recognizing activities of the abokis and the malams.
I will like to respond to the critics with the use of a scenario. First of all, this Naira Volatility Reduction Strategy(NVRS) does not encourage or recognize illegal financial flows. Secondly, it is a child of paucity of foreign exchange which resulted in the existence of the black market operators which I argued in other write-ups, that we cannot eliminate them due to the nature of customers they serve who do not want any documentation of their transactions.
The scenario goes this way: lets say that the Naira volatility is a patient who needs medical attention. This patient has been administered with orthodox medication as prescribed by the orthodox doctors but the patient in the case Naira value, has not recovered rather the condition is getting worst as can be seen from further deterioration in Naira value and depreciation of the exchange rate.
The patient now decided to try alternative medicine by approaching say a “ Babalawo”-native doctor. The Babalawo gave the patient some concoctions and herbs and the patient started showing sign of recovery after the Babalawo must have invoked the spirits of his forefathers. Now, if you ask this patient which medicine or doctor would he/she prefer, the logical answer will be to continue with the Babalawo and his medications.
This scenario, provides answer to the
critics by saying, let’s try other foreign exchange management strategies if we are not getting the desired result from the current strategy.
5. Summary
The main take always of this article are as follow:
1. That the introduction of the single floating rate of the Naira has caused greater volatility in the value of the Naira. That this Naira volatility has also, introduced a high level of uncertainty in the foreign exchange market thereby, making it difficult for firms and households to plan their businesses and decide the best form to hold their wealth.
2.The article argued that market participants will prefer a stable exchange rate even if they consider it to be higher than expected because it will help them, estimate what the rate will likely be at the time of restocking.
3.The article demonstrated the effects of high Naira volatility on asset prices and asset allocation decisions using a simplified 4 Markets Model of the economy.
It was shown that in each of the markets namely: Capital, Labor, Financial and Output, the uncertainty introduced in the markets had a contracting effect on the individual markets and the entire economy. As asset prices fluctuate thereby increasing their holding period risks, market participants had to device methods of hedging against the declining value of the Naira using different asset allocation methods. These methods include but not limited to frequent asset class analysis, market analysis and investor analysis in order to achieve improved portfolio rebalancing, resetting and realignment.
4. The effects of Naira volatility on risk assets of banks were discussed. The article recommended to the CBN to continue with the stress tests as many banks may start experiencing impairment in the quality of their loan portfolios if the current economic environment persists.
5. The article highlighted the fact that importers and most other market participants use the black market rate as a reference rate instead of the NAFEM rate in making their pricing and asset allocation decisions. The reason being that the CBN or NAFEM dollars end up in the black market through a phenomenon known as round tripping in the Nigerian parlance.
6. A strategy on how to reduce the volatility in the value of the Naira by either, eliminating or reducing the spread that presently exists between the NAFEM rate and the black market rate was presented.
The strategy called for the CBN to provide more liquidity to the market and at the same time, intervene in rate determination by selling the CBN dollars at rates closer to the black market rate.
7. This strategy is expected to eliminate the premium and subsequently, stabilize the exchange rate, improve asset allocation decision methods and reduce the volatility in Naira value. The uncertainty in the foreign exchange market will equally be reduced as market participants can predict the likely value of the Naira when replenishing their inventories.
8. The article urged the CBN Governor Mr. Cardoso to consider and adopt this one exchange rate strategy across all segments of the foreign exchange market. That this approach will help stabilize the Naira and reduce the level of uncertainty in the market.
9. The article argued that the instability in the foreign exchange market has caused unbearable hardship on Nigerians and it called on Mr. Cardoso and the Tinubu administration to do something urgently.
10. The article recognized that the success of any exchange rate policy will need the support and coordination of fiscal policy especially, as it relates to curbing corruption and government spending.
6. Conclusion
1. I will conclude this article by saying that my prescription on how to reduce volatility in the value of the Naira and thereby, stabilize the exchange rate is just one approach.
2. I will welcome other approaches to managing the Naira value. All that matters to me, is how to make the financial system including the CBN more efficient and for it to deliver the services for which it was established.
3. Finally, I take full responsibility of the content of this article and I welcome comments.
*Dr. Jona N. Ezikpe is former MD/CEO of Mannybank Plc
