EVERY Nigerian admits that her most dominated economic problem is the current shortage or scarcity of foreign currency for her capital and recurrent programme.
The Federal Ministry of Finance and the Central Bank of Nigeria as the managers of the country’s foreign exchange resources, allocate the available foreign exchange from both the public and private sectors in a manner which appears to them best for the public good.
This, the monetary authorities carry out in order to achieve the overall monetary objectives of maintaining confidence in the national currency, the naira; stabilisation of domestic wage; and prices; satisfactory growth of output; sound revenue base and credit facility for government; and the satisfactory balance of payment position.
In pursuance of these noble economic objectives, the monetary authorities establish priorities for the sale of foreign currency in respect of interest payment on foreign loans, salaries of “foreign employees, dividends, raw materials and spare parts, traveling, commerce etc.
To effectively administer the available foreign exchange incline with set priorities the monetary authorities established two regimes of exchange rates – the first tier where official government foreign ex change transactions art handled and the second tier where private and business foreign exchange requirements are taken care of.
It is the Second-tier Foreign exchange Market (SFEM) management that brought the Central Bank of Nigeria and the youngest generation of banks into a head on collision two weeks ago culminating in the barring of the latter from SFEM bidding sessions by the former. An action seen by many as arbitrary and at variance with the fundamental human right posture of this administration since the banks have been licensed to operate in Nigeria.
The CBN, two weeks ago posited that the youngest generation of banks in the country have been the major cause of the continued slide in the international value of the naira due to their high bidding at SFEM sessions.
The CBN further accused the banks of involving foreign exchange acquired from official inter-bank dealings. These banks were said to be making huge profit out of this without doing anything.
What this means in effect in the eyes of the Central Bank is that these young banks carry out foreign exchange speculation that is capable of distabilising the economy.
To put a stop to his practice, the CBN thought it best to ban the banks concerned. The question is will the banning of these banks from SFEM save the naira from further depreciation? Suppose the older banks are involved then what happens?
Those of course are questions that only time events can answer authoritatively. However, the affected banks have countered the CBN accusations with the argument that the major problem facing SFEM is hat of funding.
It is crystal clear that the funding of SFEM is grossly inadequate. In elementary economics whenever demand outstripes supply, the price of the commodity in question goes up. The naira will achieve a realistic exchange rate when the demand for foreign exchange is matched by supply.
At its inception, N196 million was offered fro bidding weekly this was not enough to satisfy the foreign exchange need during the marginal average rate auction. When, however, the Dutch auction was introduced and bidding sessions were to be held for nightly, N250 million is being offered. By simple arithmetic, one finds that this is still inadequate.
Most banks going into the bidding sessions are well aware of this underfunding. They go into the market with the intention of buying. The expectation that they might fail to acquire the much needed foreign exchange motivated them to bid high.
More importantly, the discriminatory practice of SFEM encourages smaller banks to bid high. By SFEM arrangement, the three oldest banks are allowed a 5% bid for the total funds made available in the market while the smaller to bid above 1% of the available funds. The argument is that the older banks have a large clientele to service.
Sound as this argument may seem, these younger banks equally have outstanding customers. In fact, experience has shown that most Nigerians prefer the smaller banks where their needs are easily and readily attended to the bigger banks that are existing on their good will. To establish themselves firmly in the economy, the younger banks are tempted to want to buy foreign exchange even if at high cost without which they will not keep their customers.
It can also be argued that by banning the youngest generation of banks from SFEM bidding, the Central Bank is killing the much needed competition in the banking industry. By preventing these groups of banks from SFEM the CBN is encouraging restrictive practice and increase cost customer service. These group of banks are being placed at complete disadvantage and higher risk than the older banks. What the CBN should do is to encourage competition among the different banks so as to ensure that members of the public get the best service at reasonable cost.
The CBN ought to have stopped at the ban on inter-bank dealings and the order that all bids should be supported by names and addresses of customers on whose behalf the banking is submitting the bids rate.
Moreover, considering the nature and structure of the affected banks, their access to autonomous sources of foreign exchange is greatly limited while that of the bigger and older banks is limitless. If the CBN realises that foreign transactions constitute a greater part of the banking business, restricting the youngest banks to only domestic transaction is like asking them to go out of business. As it is today Nigeria is grossly under-banked considering her size and population.