Post MPC – JULY 2021 (Re: Leaving Yams in the Care of Goats)

Dear Subscriber,

Analysts and journalists were of the view that this was going to be deja vu, another ritual of the boring status quo and reasons for and against the usual suspects- inflation, growth and interventions. But not this time around because just as the reporter was beginning to yawn, did the Governor drop a bombshell that the CBN will discontinue the sale of dollars to BDCs with immediate effect.

“What!!! Did you just hear that?” yelled analyst A to journalist B, who sighed in disbelief. Then it slowly began to sink in that the governor had just disrupted one of the juiciest gravy trains in the Nigerian economic racket. Even though BDCs are licensed by the CBN, the point had been reached where the program was no longer tenable and surely not sustainable.

A country whose total exports and receipts were approximately $59.8bn, was spending $5bn to subsidize supposed Nigerian tourists during a covid year. In other words, spending more on tourism rather than debt servicing. Therefore, the structure of the forex market needed sanitization.

The question that arises is what is the optimal solution? Administrative controls or market pricing? The interim solution of substituting BDCs with banks is hardly going to achieve much. You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats.

One of the options is to simultaneously allow banks to retail dollars as they have done in the past and make BDCs engage in retailing same but at a buy rate different from today’s subsidized rate, i.e buy dollars from the CBN at the parallel market rate less a N10 premium. For example, if the parallel market rate is N500/$, the purchase rate from the CBN will be N490/$. If the BDCs sell at N550/$, the CBN increases its rate for BDCs to N540/$. That will be the same retail rate at the banks. This eliminates the arbitrage corridor and abuse. It will certainly reduce the demand for dollars and it must coincide with an increase in dollar supply from the CBN. This way, the naira will appreciate towards the ever elusive fair value or the REER (Real Effective Exchange Rate), which today is anywhere between N470 and N490/$.

In the slides and video link below, Bismarck Rewane carried out an insightful analysis on the recently concluded MPC meeting on the Channels television news at 10pm program.

Do enjoy…