The Central Bank of Nigeria (CBN) has announced plans to create a two-tier foreign exchange market in an attempt to solve the persistent fall of the local currency against the dollar, BusinessDay reported.
According to Nigeria’s Monetary Policy Committee headed by the CBN governor, Godwin Emefiele, forex will be allocated in the first market at N197 per dollar to priority areas such as fuel imports and local manufacturers while the second naira-dollar forex market will have a more flexible exchange rate, where foreign investors, institutional players, importers, traders as well as students, can buy and sell forex more freely at determined rates.
The two-tier forex market is not strange to Nigeria as it was employed during the regime of Late General Sanni Abacha although it was marred with corrupt practices. Apparently, the CBN has to set up strong monitoring mechanisms to ensure that buyers from the first market (where forex is sold to priority areas at official rates) do not cross into the more market-determined second tier market.
The CBN, in its move to solve the country’s currency crisis, can also learn from Egypt’s Central Bank protectionist policy to make the Egyptian pound “artificially strong” against the US Dollars. In the past three months, the Egyptian Central Bank injected over $14 billion dollars into local banks to facilitate import activity and curb inflation on essential goods.
In a move seen by economists as a way to limit dollarization ahead of potential currency devaluation, Egypt’s state banks raised interest rates on certificates of deposit to 12.5 percent from an initial amount of about 10 percent in November.
The CBN’s foreign exchange reserves have dropped 33 percent to $27.8billion between January 2014 and 2016 as official monthly inflows fell to less than a billion dollars last month and is said to have an import bill of over N917 billion monthly. To meet this demand, the CBN will have to spend about $4.5 billion monthly which will deplete its reserves within 6 months without inflow.
