Foreign Exchange in Nigeria – Management of Foreign Exchange In Nigeria By CBN
In Nigeria, the term foreign exchange has become a house hold expression due to the activities of the street hawkers of this very essential commodity. According to Aniforrse (1997:19) “foreign exchange is a financial assets usually denominated in foreign asset earned through exports of good and services as will as inflows of foreign investments, external grants and loans. The quantum of foreign exchange available of any point in time constitutes foreign exchange resources or restores.
Ude (1996: 146), foreign exchange is an internationally convertible currencies, it is the most import component of international liquidity used because it is the most widely used money in international trade.
Enoal (1973: 277), Explained foreign exchange to donate the holding of foreign currency, which more properly should be added exchange reserves.
When there are inadequate supply of exchange, pressure may be exerted on foreign exchange reserve if the reserves are not inadequate there will be balance of payment problems. In order to avoid those problems foreign exchange management is therefore necessary (Ogarauma, 1997:3)
Ezeuduji (1996:46), the management of foreign exchange will reduce to adverse effects of foreign exchange rate volatility.
Sanusi (2001:29), the volatility and continued depreciation of the exchange rate of the naira is principal caused by the expansionary liquidity and the resultant persistent excess liquidity in the banking system supply of inelastic of both domestic production and the foreign exchange market with its further destabilizing speculative activities need to be managed ineffectively.
Odozi (1986:17), in managing our foreign exchange resources, it is important that they are maintained at a level consistent with our currency and that they are optimally deployed.
Aluo (2001: 21), to ensure effective management of foreign exchange, the fundamental problems of nations’ economy must be addressed. This evolves an improvement in the state of infrastructure increase, local capacity utilization and a reduction of the cost of doing business in Nigeria,. This should be done through the deregulation of the energy sector to enable private investors to participate in the provision of electric and telecommunication, locally produced goods should be encouraged .
Aderibigbe (1997:8), the consolidation of the external reserve holdings in the CBN has existed on the central Bank , the charges of adopting and sharpening management skills that would ensure that the reserves are not only conserved but also optimally deployed for essential needs. This has entertained over the years, designing ways of effecting monitoring the of foreign exchange resources. The instruments employed by the Central bank in managing the foreign exchange resources are management reserves flow and management of reserve stock.
2.2 MANAGEMENT OF RESERVE FLOWS
EXCHANGE RATE: Ude 91996:113), “ An exchange rate is the price of a currency expressed in another currency or currencies”.
OJO (1986:6), derived foreign exchange rate as the numerical value of the domestic currency of one country at any given time in relation to those countries with which the country has trade links indeed, the exchange rate is vendible instrument of economic management and therefore an important macro economy.
Ude (1996:113), “An exchange rate is the price of a currency expression another currency. It also denied exchange rate management as choosing an exchange will take place.
According to Ukpong (1997:23), the requirement of a good external reserve management strategy usually compels a country to maintain an adequate level of reserve. The exchange rate has to be right as an over- valued exchange rate for instance, put pressure on the reserve as a result of the increased demand
In the past current exchange rate policies have been used depending on the condition of the economy at easy given period and sometimes in response to the changing exchange rate policies in the rest of the world. The different policy stances of the country’s exchange rate regime and management date back to 1959 and have undergoes various changes to date.
2.3 THE PERIOD 1959 -1994
Ojo (1998: 8-9), during the period of exchange control (1962 – 1986) adhoc administrative measure were applied between 1959 and 1967; the country’s exchange rate maintained a panity with the pound sterling until the actualization of the sterling by 10% to 1967. following the change of the Nigeria pound to naira in 1973. fixed exchange rates were established for both the pound sterling and the us dollar.
ACCORDING TO Obadans (1972:4) the reason for adopting the fixed exchange rate system are to promote orderliness in foreign exchange market and certainty in international trade transactions.
Nwachukwu (1998:13) prior to 1971, Nigeria operated a fixed exchange rate system in time with the general practice following the erection wood accord. However, during the 1970s, unprecedented changes occurred in the international financial system such time intransigent high rates of both inflation and unemployment compounded by low productivity and instability in the world money market forced many countries to change their exchange rate policies between 1972 and 1974, the monetary authorities applied to pay naira to the Us dollar. The period coincided with the oil boom era and Nigeria adopted a policy of progressive of the naira from N1.00 = $0.65 in 1981, despite deficits in the non – oil current accounts
Olukola (1991: 27), the country’s official foreign exchange reserves which stood at about Us $ 1.00 billion at the period of 1981.
According to Atoloye (1995:33), to minimize the pereminal problem of high incidence of arbitrage in the naira exchange rate quotation. It was agreed in 1985 that a one-currency intervention system be adopted. In the system, the naira exchange rate was quoted against at single intervention currency, the us dollar. The naira was progressively depreciated from us N1. 85 to one naira in 1985 to us N 1.30 in 1985.
2.3 THE PERIOD 1986 -1997
Obaseki (1997 :281), prior to September 26, 1986 when the naira was floated in the second tier foreign exchange market (SFEM), the domestic currency was managed under a fixed exchange rate mechanism and international transactions were subjected to expensive exchange and trade control regulations. The floating of the naira was predicted on the adoption of the SAP in July 1986. the SFEM was operated along side a managed first tier official exchange rate, while the second – tier exchange rate were managed in July 1987 into a initial exchange rate and the market was liked foreign exchange business where banks transacted foreign exchange business among themselves was evolved in 1988but was discontinued in 1989 as a result if its destabilization tendencies. The autonomous rates were simply depreciated and they finance rent seeking activities. SFEM and the autonomous market were eventually managed in an enlarged inter – bank market. The inter market used average, weighted average to determine the exchange rate at different times.
In order to reduce instability in the foreign exchange market, the procedures were modified in December1990 when the Dutch Auction system (DAS) were re- introduced. The DAS was first applied in April 1987 but the instability in the forex market could not be summed. As a result, a model weighed average method of exchange rate determination was introduced in August 1991. the system succeeded in reducing wide fluctuation in the official exchange rate, but instability soon set in as the parallel market premium reached 79% on February 1991 compared with the 35.5% in 1991 and international acceptable stammered of 5.0 to arrest the drift, the CBN completely floated the naira on march 5, 1992. Under the system, the CBN was ready to sell unlimited amounts of foreign exchange provided that appropriate Naira cover was provided
The official exchange rate for the naira was administratively pegged at N21.1960. for most of 1993, while foreign exchange allocation was done on a prorate basis. As a result , the parallel market exchange rate continual to diverge widely from the official exchange rate with the bureau de change exhibiting similar trends.
The emerging parallel market premium was considered too large to be allowed to persist , as it was a distinctive to the policy stance of achieving exchange rate stability and optimal foreign exchange . this in 1994 the federal. Thus in 1994 the federal government formally pegged the official exchange rate at N21. 1960 = $1.00, re- affirmed trhe illegality of the parallel market or foreign exchange transactions and prevented bureau de change to from selling foreign exchange. All foreign exchange receipt were also centralized in the CBN. the pro- rate system of allocation of foreign exchange was continued in 1960
2.4 THE PERIOD 1995 TO JULY 2004
in 1995, the dual exchange rate policy was re-introduced as guided deregulation, gradual deregulation was aimed at addressing the substantial depreciation of the naira exchange rate in the parallel market and achieving efficient allocation and utilization of resources. In this regard, the exchange control act of 1962 was repealed, while the foreign exchange provision decree 17 of 195 was promulgated. The decree established the autonomous foreign exchange market for trading in the privately sources foreign exchange while the fixed exchange rate in the official market remained for government transaction. The exchange rate of the naira to dollars by end of December 1996 was N80.00 to $1.00.
Following the introduction of additional foreign exchange policy measures in the federal government budget for 1997, there was too mush pressure on the foreign exchange market caused by the liberalization in the payment to certain transactions. This led to the depreciation of the AFEM rate to n85 to $ 1.00 in May 1957.
According to mallam (1999:5), in order to consolidate its gain, the policy the guided depreciation continued in 1998. The exchange rate of the naira in the AFEM remained relatively stable floating between n80 and N86 to us $1.00.
The system of dual exchange rate continued in 1999. the year impressed excessive demand for AFEM which put pressure on he value of the naira and exchange rate moved from N94.88 in may, at the AFEM. Paraell market moved from N94.26 in January 1999 to N104 while bureau de change rate also rose up to N103.30 from N94.45 in the same period.
To stop further increase in the exchange rate, the CBN in June 1999 amended foreign exchange policy guideline o restrain banks from making spurious foreign exchange demand. In October 1999, the CBN abolished the autonomous foreign exchange market and introduced a new system of trading called the inter bank foreign exchange market (AFEM). This system dollars oil firms and oil sourcing companies to sell foreign exchange they brought into the country to meet their local expenses to any bank of their choice including the CBN. The exchange rate gradually moved upwards from N96 to $ 1.00 and by December 1999, it stood at N98 to $1.00 at the inter bank market opened a near window through which foreign exchange from oil firms could be sourced by participants comprising the dealers should be able to influence the rate through the volume of foreign exchange they are able to muster and supply while the CBN plays some moderating role as an interested participants.
In the year 2000, the federal government scrapped the dual exchange rate system by merging both government officials’ exchange rate and autonomous foreign exchange market. The official exchange rate of N22.00 to Us and $1.00 was removed.
This development compelled with government agencies and parestatals to patronize IFEM. The exchange rate for the 2001 was N111.20 to Us and $100 at foreign exchange market and N128.00 to $1.00 at the parallel market.
A look at the exchange rate movement since the beginning of 2002 showed that the CBN has not get the right solution to tackle the problem, from $1.00 to N10 January 2002 and N131 as then, the naira further depreciateN121.0 = $1 in 2003 during the same period, the parallel market rate also depreciate to 2004, was realignment are necessary to realize the over all objectives of boosting local production and widening the range of export to aim the naira value.
2.4 TRADE AND EXCHANGE CONTROL
According to CBN Brief (1993:4) trade and exchange control were the most prominent instrument of foreign exchange management as it exerted direct impact on various aggregates in the form of import and export licensing requirements, imposition of trades and restrictions on categories of imports and exports controls were tightened at period of crisis but loosened at period of less pressure. Thus from 1970 to 1975 and 1980 controls were liberalized tightened progressively from 1976 to 1999 and from 1981 to 1985 when foreign exchange situation worsened and the pressure on the balance of payment persisted.
2.5 ADMINISTRATIVE CONTROL
Administrative measures were introduced to strengthen back and exchange controls, from 1982 to 1983. the CBN used the requirement of form “M” registration as a supplementary but effective instrument of import control. Another type of administrative control used by the CBN was the monitoring of the utilization of import licenses. This was done to ensure that the prescribed values on the licenses were not exceeded and that the items corresponded with those on the import licenses.
2.6 MANAGEMENT OF RESERVE STOCKS
The reserve management strategy of the CBN is based on liquidity management and capital preservation as the level of foreign exchange fluctuates from year to year. Complied with the unpredictable CBN has endeavored to place the reserves in assets time are sufficiently of our external obligations. To this end the CBN has to realize most of its foreign investment and to shortened the maturity profile in favour of more liquid assets. This has resulted in recent years, completed elimination of all sons investment from the portfolio. The present investment strategy of the CBN before as to hold the larger proportion of our reserves in secure, liquid (non yielding) assets principally in foreign government treasuring bills and time deposits.
2.6 ii ASSET DIVERSIFICATION
CBN briefs (1998: 4-6), the risk of concentrating the reserve holdings exclusively in one or few convertible currencies is the loss incurred when the host assets undergoes depreciation. Consequently reserve diversification has always been pursued by the CBN primarily to preserve the value of the country’s external assets and secondly to yield income.
Anifourse (1997:24) early, the CBN recognized the need for diversification but was constrained by a number of factors from doing so among which was the fact that the limited kingdom continued to be our leading trading partner even after Nigeria’s politics independence. To this end, an investment committee was constituted in 1974 following the multiplier increase in the CBN’s holding of external reserve. The committee was changed with the task of selecting the right type of investment available in various capital markets at reasonable prices by 1978 the assets holding had been diversified into nine different convertible currencies. As at the end of 1996. the CBN’s foreign exchange holding were diversified into 15 different currencies with holding in Us dollar accounting for 88.2% of the total. The other currencies are Deutshe marks (9.1%), pound sterling (1.2%) and French Fran(0.7%). Holding in these four currencies accounted for 99.2% of total foreign exchange holding of the CBN as at the end of 1996.
2.7 FOREIGN EXCHANGE PROBLEMS
Aluo (2001:21), the major causes of disequilibrium in the foreign exchange market are excess supply of money into the economy low capacity utilization, poor infrastructure, high importation, low exportation, policy inconsistency, and High of malpractice on the part of the market operations and fiscal indiscipline.
Ndufor (1999:25), one of the multiple problems facing out foreign exchange market is the problem of excess liquidity in circulation.
Sanusi (2001:29) “The volatility are continues depreciation of the exchange rate of the naira is predominantly caused by the expansionary fiscal policy and the resultant persistent excess liquidity in the banking system; supply of inelastic of both domestic production and the foreign exchange market with its further destabilizing, speculative activities.
Balogun (2001:23), said that the persistent demand pressure and the consequent depreciation of the naira exchange rate could be traced to the excess liquidity in the system indulged by the transfer of government accounts from CBN to banks and the huge extra budgeting spending of 1999 on unproductive ventures, heavy debt, services burdens and speculative demand driven by uncertainties created by social and political unrest, expectation of future depreciation as the naira weakens as well as the determination of the external sector position.
2.8 FOREIGN EXCHANGE CONTROL
According to Orjih (1998:214), exchange controls as a mechanism by which a country seeks to mobilize its foreign exchange resources and ration them or the settlement or international transactions in accordance with the national’s priority. Exchange controls in Nigeria dated back to December 1950 when the exchange control act ordinance was enacted. It was later known as the exchange Act of 1962. This act was amended in 1966, 1969, 1990 and subsequently replaced in the year 1995.
In this view, Ezenwa (2001) said that “in a move to stabilize the naira and sanitize the market, government directed the Central Bank of Nigeria to impose stringent penalties on banks that engage in foreign exchange malpractice.
Cirome (2001:21), attributed the naira’s woes to a sharp increase in formal disbursed to the three tiers of government the rise in the foreign exchange demand in the last years. Cirome lamented that in spite of the measures just in place. The exchange rate has remained high, which is an indications that the amount of funds released into the domestic economy is too high for its to been the heat”
Another measures adopted by the CBN to control the problems facing exchange market are; amendment of foreign exchange, guidelines to limit variations banks exchange rate on daily basis to so Kobo and prohibition of government official from the CBN through banks.
2.9 FOREIGN EXCHANGE MARKET AFEM
The inter-bank foreign exchange market was introduced ad a new trading system in October 1999, to regulate the autonomous foreign exchange market (AFEM). The system was introduced in the country to meet their local expenses to any bank of their choice including the CBN
According to Attah (2000:23), “ the exchange rate of the naira, more than ever is now freely determined by the market” before now, the exchange rate was arbitrary fixed. The official rate was preciously arbitrarily fixed by the CBN. But since is now a free market and the exchange rate are determined by a convergence of forces of the bank, CBN and consumers, all influence the rate. It is a convergence of demand and supply and intermediary activities of deals.
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This article was extracted from a Project Research Work Topic:
“MANAGEMENT OF FOREIGN EXCHANGE IN NIGERIA BY CBN (1959- JULY, 2004)”
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Foreign Exchange in Nigeria – Management of Foreign Exchange In Nigeria By CBN
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