A couple of weeks ago, the Central Bank of Nigeria provided an answer – a special rate of around N380 to $1 was created for those travelling abroad, paying foreign school fees or medical expenses. From now on, every Tuesday, the CBN will sell forex to banks for the purpose of meeting the demand that falls into the above categories. If your flight time is 5 hours or more, you are ‘entitled’ to $4,000 at a subsidised rate per quarter. That is, you are not entitled to this fundamental human right if you are going to Rwanda, but you can get it for travel to South Africa.
If this is the answer, what was the question? Did Nigeria get to this forex crisis because it stopped subsidising foreign currency expenses by the middle class? Of course, the move has been very popular with Nigeria’s middle class. But then, bringing back firing squads at the Bar Beach in Lagos will also be popular if you asked Nigerians to vote on the question in a referendum. Popularity may not be a good test of whether the policy is right or not.
To be fair, there are positives to CBN’s latest move. In recent times, the dollar has become a kind of asset that only ever goes up. Naturally, this attracts more and more people who are looking to protect themselves against the effects of inflation and devaluation. Every other type of asset rises and falls over time. Except the dollar in Nigeria. By intervening in the market the way it did and subsequently allowing the naira to strengthen, this one-way direction of travel was stopped, if only temporarily. This is the way any normal asset should behave – sometimes it goes up, other times it goes down. In other words, you should avoid playing short term games with it. From around N530 to $1, the rate has moved to N450 to $1.
The other useful thing CBN has done is to narrow the gap between the official (fake) exchange rate at the interbank market and the black market (real) rate. The size of the gap is a very accurate reflection of the failure of the official market. The correct exchange rate for a currency is the rate at which everyone who wants to exchange naira for dollars can get it to buy. By creating a new subsidised rate for the middle class, even the CBN has agreed that the attempted ‘float’ from last year was a sinking one. Those who were chased out of the official market have now been welcomed back into the light from the darkness of the black market.
We are now left with a further question – what has it taken to achieve this and is it something that is sustainable? A rough calculation suggests that the CBN will need to ‘inject’ around $500m into the market every week just to keep the exchange rate stable (latest figures released by CBN show that it sold less than $1bn in the whole of January). When I was in the university, chain smokers were referred to by a name that suggested they only needed a lighter for the first cigarette. After that, before each cigarette’s light went out, it would be used to light the next one. The strategy embarked on by CBN is something like that. As long as it is ‘injecting’ that amount of money into the market, it can buy stability. It’s a balancing act that cannot be stopped or else the lights will go out. If it stops, the rates will begin to climb back up with a vengeance and it would simply have wasted all the money it previously injected into the market.
This forex crisis and especially the halfhearted responses to it have taken a very big toll on Nigeria in ways that are difficult to quantify. Who can calculate the sheer amount of Nigerian brainpower that has been diverted into thinking about forex every day for the last 2 years? How much has this distraction cost the economy? We may never know. But the crisis rolls on with only a brief pause here and there. Yet, all this could have been avoided with a bit of honesty from the very beginning. When a country loses half of its income from a commodity it relies on for almost all its foreign exchange, there can be no painless way to adjust to a new reality. The only debate is about the degrees of pain and the kind of payoff available at the end of the painful period.
Of course, floating the currency will bring the pain of inflation with it. But monetary policy usually takes 12 to 18 months to pass through the economy. This is the time it takes for the economy to adjust to new prices and ways of doing things. Unless things change – like oil going back up to $100 per barrel – there is no way to live the champagne life of 2014 and on a new reality of beer salary. The way to make this adjustment happen is to allow prices change. It may sound simplistic but not everything is meant to be so complicated in life.
Enjoy your PTA ‘entitlement’ if you can get it. It is your fundamental human right as a Nigerian to enjoy subsidised dollars to spend abroad. You didn’t make the rules, CBN did. But there are now very few wrong options left in this forex drama. Sooner or later, we will be forced to do the right thing when it is the only option left on the table.
Safe journey when you travel.