SOME WRITE

Dollar Sells at N126 as Dutch Auction Debuts
Bids as high as N135.99
By Ayodele Aminu

Indications that the naira may continue its depreciation course emerged yesterday at the newly introduced Dutch Auction System (DAS) as banks on behalf of their customers offered to pay as much as N135.99 to exchange for a United States dollar.

According to the result of yesterday's DAS transactions obtained from the Central Bank of Nigeria (CBN), Zenith Bank quoted the highest successful bid rate of N135.99 to a dollar while seven other banks quoted the lowest successful bid of N126 to a dollar.

The DAS, a bi-weekly trading system, was introduced by the CBN at the weekend to replace the daily Inter-bank Foreign Exchange Market (IFEM) and which is to be moderated by the apex bank.

As at last Friday, the naira had exchanged for N125.65 to close the week at IFEM.

The CBN had Monday offered for sale $40 million which was overshot by over $1 million and purchased by 17 banks out of 22 that sent their bids and had demanded $62.64 million. The CBN sold $41,052,898.49 to the 17 banks.

The CBN said it rejected the bids of five banks whose documentations were not presented based on the stipulated requirements.

While some of the banks' customers had no corporate registration number, others used one number for several companies. Some also gave insufficient company address while other bids were below the marginal bid rate.

In the transaction analysis released by the CBN last night, rates quoted by the banks as against the dollar were as follows: Zenith Bank N135.99, Investment Banking and Trust Company (IBTC) N131.10, Guaranty Trust N130.50, Access Bank Limited N129.95, Marina International Bank N127.50, United Bank for Africa (UBA) quoted between N127 to N128 and Wema Bank Plc quoted between N126.50 to N127.25.

Others are Capital Bank International N126.65-N127.25, Societe Bancaire N126-N126.50, Trust Bank N126.65, MBC International Bank N126-N126.50, NAMBL N126, Afribank N128.50, Regent Bank N126,15, Gateway Bank N126 and Chartered Bank N126,

The transaction analysis showed that Access Bank and IBTC were successful in all their request while Chartered, UBA and Societe Bancaire could not get all they had asked for.

Those whose bids were outrightly rejected by the apex bank are Union Bank, Standard Chartered, First Bank, Indo-Nigerian Bank and ACB International Bank. In all, the apex bank rejected bids totalling $21.6 million.

It would be recalled the naira lost a total of N4.50 last week. Last month alone, it lost a total of N3.30. Since the beginning of this year, the naira which opened the year at the exchange rate of N113.45 has lost a total of N18.53.

The CBN, in a circular announcing the introduction of DAS, had explained that it would be announcing at 8.30 am on Mondays and Wednesdays the amount on offer for each auction at both its Abuja and Lagos offices.

The circular reads: "Under this system, authorised dealers shall submit their customers' on Mondays and Wednesdays. The CBN reserves the right to reject bids deemed to be unrealistic and/or any application that contravenes foreign exchange regulations."

The dealers are also expected to submit their customers' bids duly signed by two authorized signatories for any particular auction session between 9.00 am and 12.00 noon of the day of auction, it added.

The minimum bid amount by authorised dealers, CBN stated, is N100, 000 and the currencies of transaction shall be naira and United States dollar.

DAS was the system in place in the country from 1987 to 1989. Incidentally, it was discarded because of volatility of naira exchange rate during its regime.

A dwindling oil revenue and worsening balance of payment led to the partial liberalisation of forex regime in 1986. In that year, CBN introduced the Second Tier Foreign Exchange Market (SFEM). While the first tier market was officially designated for all official transactions of government, the second tier market was used for other commercial transactions.

This was probably the first time Nigerians were granted the right to hold foreign exchange accounts and to carry out commercial transactions with it.

From 71 kobo $1.00 in 1970, the official exchange rate appreciated to a peak of 55kobo/$1.00 in 1980 before losing value to 89kobo/$1.00 in 1985.

The official exchange rate crossed one naira to a dollar mark for the first time in March 1986, when it exchanged N1.0016/$1.00.

CBN, however, sharply devalued the naira by over 250 per cent from N1.32/$1.00 to N4.64/$1.00 in September 1986.

Government explained then that it was meant to encourage rapid expansion in the revenue derivable from non-oil exports and to achieve the other objectives of Structural Adjustment Programme (SAP).

Government, however, discarded the policy of fixed exchange rate and adopted a policy of guided deregulation of the forex market in 1995.

The Autonomous Foreign Exchange Market (AFEM) was then born in 1995. Towards the end of September 1999, AFEM gave way to IFEM, which held sway till last week.

The re-introduction of the Dutch Auction System could be the messiah for our desperate foreign exchange market. But what exactly is it and is how we bid for foreign exchange the real problem? Isioma Daniel attempts to decipher the recycled CBN venture

Gone are the days when the naira was so closely pegged to the dollar, that N5 or less could buy you a piece of Uncle Sam. This sounds like a fairy tale or an urban myth. Was there really ever a time in Nigeria when people were willing to pay so little for foreign exchange? It seems so. It is also quite interesting to note that the people old enough to remember such good financial days are now holding the top economic decision making spots in the Central Bank.

On July 18 these old 'wise' men recently scrapped the 30 months old Inter-bank Foreign Exchange Market (IFEM) in favour of the Dutch Auction System (DAS). According to the Central Bank, IFEM was dropped because an overwhelming demand for forex was outstripping supply. Nigeria is heavily dependent on imports so businesses need foreign currency to pay for the goods they buy from other countries. The negligible amount we export is usually in its crude state. This is particularly true for our number one exported commodity - oil. Proceeds from the sale of crude oil are the source of 98 per cent of the nation's foreign exchange.

During IFEMs days the demand for foreign exchange was hovering between $35 million and $50 million a day. Meanwhile, Nigeria's foreign reserve has been persistently crashing, with each new month recording a further drop. In January 2001 our foreign reserves registered $10.116 billion and fell to $9.23 billion in August 2002. The country's gross external reserves at the end of May amounted to $9, 226.3 million representing a decline of 1.9% from the $9, 403.4 million recorded in April 2002.

The naira has also continued a dangerous slide, depreciating at an alarming rate from N83.8 to one US dollar in 1999 to N125.65 to one US dollar, hence naira has lost 4,185 kobo or 49.58 per cent of its original value under the present management of the CBN. No wonder the inflation rate, which was 13.5 per cent in 1999, rose to 18.9 per cent at the end of 2001.

This might all sound like goobly gook to the non-business mind. However, it doesn't take an expert to see that since the introduction of DAS, the dollar has been selling at N135.00 compared to the N125.65 it was trading at on the last day of IFEM and Nigerians are now spending N203.50 to buy a pound. One pound that can barely get you a bus fare or a weekend newspaper in London can buy you a taxi ride in Nigeria, if you are lucky.

You don't need a Harvard graduate to tell you that it is an underestimation to say this doesn't bode well for the nation's economy. It's quite a depressing picture but before your mind is blown apart by complicated business terms, you need to understand what exactly the Dutch Auction System is and how it works and if it will heal our sick exchange rate.

The A-Z of DAS

The Dutch Auction System is popularly used as a bidding method on those internet auction sites that claim to sell everything from a new heart to diamonds. In this format the seller places one or more identical items on sale at the same time listing a minimum required price. Bids are ranked in order of price, then quantity, and lastly time. These auctions are timed events usually lasting either hours or days. Bidders submit the number of items they want and how much their bid per item is. The final selling price in this type of Dutch auction is determined by the lowest of the winning bids.

Another name for it is the descending-price auction, commonly known in academic literature as the Dutch auction. It is the technique used in Netherlands to auction produce and flowers (hence, a "Dutch" auction). It uses an open format rather than a sealed-bid method.

In Nigeria, the DAS bidding takes place on Mondays and Wednesdays. The minimum bid amount by an authorised dealer is $100, 000.00 and the currencies of transaction are the naira and the United States dollar. The CBN announces every Tuesday and Thursday the result of each auction and the official exchange rate. Nigeria is not alone in using the Dutch Auction System.

Dutch auctions have been used to finance credit in Romania and for foreign exchange in Bolivia, Jamaica and Zambia. In America the national treasury sometimes uses it to sell its new treasury notes or treasury bonds. The Treasury opens up all bids and determines the lowest acceptable bid price. All successful bidders pay this stop-out price.

An example could make it clearer. Let's say the Central Bank has 20 million US dollars on sale and the minimum selling price for a dollar is N20. Buyers can ask for as much as they want as long as it is not lower than $100, 000. Five companies bid N30 for one dollar each and ten others bid N50 for one dollar. These fifteen companies will want different quantities of dollars. Some would be bidding for $6 million, while others would be bidding for $20 million. Because the ten companies bid higher than the other five, they will definitely be guaranteed foreign exchange. But all fifteen companies will pay N30, the lowest successful bid. It is this minimum price that becomes the Central Bank's exchange rate. Anyone who wants to buy a dollar from the central bank will pay N30.

It might sound complicated, but the majority of Dutch auctions are simple. Most users win the items they bid on at the minimum asking price. Here are the key points.

_ Sellers start by listing a minimum price or starting bid for one item, and the number of items for sale.

_ Bidders specify both a bid price and the quantity they want to buy.

_ All winning bidders pay the same price per item - which is the lowest successful bid. This might be less than what you bid!

_ If there are more buyers than items, the earliest successful bids get the goods.

_ Higher bidders are more likely to get the quantities they've asked for.

_ Proxy bidding is not used in Dutch Auctions.

_ Bidders can refuse partial quantities. For example, if you place a bid for 10 items and only 8 are available after the auction, you don't have to buy any of them.

This isn't the first time that the Dutch Auction System has been used to sell forex in Nigeria. DAS had earlier being implemented in April 2, 1987 and December 14, 1990. It was scrapped because it failed to improve the dire exchange rate situation.

Will It Work This Time?

Considering that DAS was used twice and it failed on both occasions, no one is placing bets in favour of it succeeding again. Why? There are two major flaws to the DAS system. The first one is that demand tends to exceed supply and although everyone pays the lowest successful price, DAS actually does more favours for the high bidders. How?

Its success in reducing excess demand of foreign exchange is hinged on the Central Bank's ability to reassure bidders that there is more than enough foreign currency to meet their needs. If they can do this, the naira will appreciate with every trading session. However, every Nigerian is aware that the nation's foreign and external reserves have been reducing every month because of capital flight and falling crude oil prices. In January 2001 our foreign reserves registered $10.116 billion and fell to $9.23 billion in August 2002. The country's gross external reserves at the end of May amounted to $9, 226.3 million representing a decline of 1.9% from the $9, 403.4 million recorded in April 2002. Yet government spending has been on the increase since the beginning of the year, culminating to a deficit of N93.2 billion within the same period.

So despite statements by the CBN Deputy Governor, Monetary Policy, Dr Earnest Ebi that "we are in a position to put out any amount of foreign exchange we want to put into the market. We are not just flying blind, we have a pre-determined view of where we are going and we are not going to allow any arbitrariness in the system," it seems buyers are not convinced.

This week out of the $85 million offered for sale by CBN, the total amount demanded by 42 banks stood at $107 million. Demand outstripped supply by $22.02 million. Also, the seventy-two successful bids amounted to $88 million so CBN overshot its amount on sale by $3.14 million.

Demand exceeding supply is the key flaw of the DAS system and it can only lead to further depreciation of the naira. On Tuesday the naira depreciated by N1.00 against the US dollar at the seventh session of the DAS. It is important to note that the excess demand led to the naira's depreciation. The naira has persistently appreciated on the two occasions when CBN flooded the market with forex.

It appreciated two Friday's ago when the CBN exceeded the $150 million it offered by $46 million. It also firmed up last week Wednesday when a total of $115 million was offered. CBNs ability to keep the forex storehouse adequately stocked up is the key to DASs success, but with the strained foreign reserves this might not be possible.

Already financial analysts are criticising the CBN of a big conspiracy to dump the blame for high exchange rates on buyers. Is there any justification behind this claim? There could be.

If you are the lowest bidder in a Dutch auction and you specify a multiple quantity, you may not get to purchase all that you specify. Why? Because there may be little left over after the high bidders get their share. So although everyone pays the lowest price, those who bid the highest are more likely to get the amount of forex they requested for. The only way to avoid this problem is to make sure you are not the lowest bidder! If everyone is trying to make sure they are not the lowest bidders then the end result will be a high exchange rate. This is the second flaw of the Dutch Auction System.

Is There A Better Alternative?

There is no doubt that the three-year-old IFEM aggravated the huge gap between the parallel market and the official market. As soon as IFEM was introduced banks began to exploit the system making speculative and artificial demand for forex, which was thereafter sold at a higher exchange rate at the parallel market. It is believed that about 60 to 70 percent of demand for forex in IFEM were speculative or artificial demand as reflected by the amount of forex involved in the forex malpractice perpetrated by the 21 banks recently banned from IFEM.

The root of our exchange problem is Nigeria's dependence on imports. Nigeria imports the most basic of goods, including goods that we produce in the country. This creates pressure on the naira and an exaggerated demand for foreign exchange. Also as capital spending increases and the government awards contracts, businessmen need more foreign exchange to bring their goods into the country.

Concerning the parallel market, anyone who has ever been through the long and headache inducing process of buying forex from the CBN knows that the appeal of bureaux de changes and black markets is hard to resist. If the CBN really wants to discourage people from patronising the black market it needs to make it easier for honest individuals and companies to buy from the CBN while creating disciplinary measures for some of our dodgy banks and businessmen. According to an analyst when most businessmen calculate the hassle as well as expense of buying from the CBN they eventually decide to go to the simple, less difficult, less questioning black market. CBN should reduce the red tape and actively promote the apex bank as the most profitable and efficient avenue for foreign exchange there is.

Obviously, the burden doesn't lie only on the CBN. The federal government has to make macro-economic steps to industrialise our economy. Wouldn't it be great to see trucks taking finished goods to foreign countries for export? Or to walk into a supermarket and sixty percent of the goods are from our factories and industries?

As for the new initiative, only time will tell if it is going to be third time lucky for the Dutch Auction System.

DAS, was the system in place in the country from 1987 to 1989. Incidentally, it was discard because of volatility of naira exchange rate during its regime.

A dwindling oil revenue and worsening balance of payment led to the partial liberalisation of forex regime in 1986. In the year, CBN introduced the Second Tier Foreign Exchange Market (SFEM). While the first tier market was officially designated for all official transactions of government, the second tier market was used for other commercial transactions.

This was probably the first time the Nigerian citizens were granted the right to hold foreign exchange accounts and to carry out commercial transactions with it.

From 71 kobo $1.00 in 1970, the official exchange rate appreciated to a peak of 55kobo/$1.00 in 1980 before going losing value to 89kobo/$1.00 in 1985.

The official exchange rate crossed one naira to a dollar mark for the first time in March 1986, when it exchanged N1.0016/$1.00.

CBN however sharply devalued the naira by over 250 per cent from N1.32/$1.00 to N4.64/$1.00 in September 1986.

Government explained then that it was meant to encourage rapid expansion in the revenue derivable from non-oil exports and to achieve the other objectives of Structural Adjustment Programme (SAP).

Government however discarded the policy of fixed exchange rate and adopted a policy of guided deregulation of the forex market in 1995.

The Autonomous Foreign Exchange Market (AFEM) was then born in 1995. Towards the end of September 1999, AFEM gave way to IFEM.

CBN amends forex guidelines

By Alao Salimon

Central Bank of Nigeria (CBN) has amended the foreign exchange guidelines in order to reduce capital flight.

The apex bank said a consultant’s verification of National Office for Technology Acquisition and Promotion (NOTAP) certification would be required for foreign exchange disbursements for technical fees and royalties.

The new policy took effect from January this year according to monetary policy guidelines for 2004/2005.

The policy changes was informed by CBN discovering that there has been significant rise in foreign exchange transfer under the invisible category in recent times.

The apex bank noted that in particular, requests for technical fees have been rising sharply without the commensurate level of transfer of acquisition of technology by the country.

The new policy is expected to engender transparency and accountability in the management of the nation’s foreign exchange.

The total foreign exchange sold by CBN at the Dutch Auction System (DAS) between January and November 2003 stood at $8.99 billion representing an increase of 21.6 per cent over the amount in the corresponding period of 2002. The naira exchange rate under DAS averaged N128.67 per dollar in the eleven-month period compared with N120.23 per dollar at the inter bank foreign exchange market (IFEM) in the corresponding period of 2002, indicating a depreciation of 6.6 per cent.

The evolution of the foreign exchange market in Nigeria up to its present state was influenced by a number of factors such as the changing pattern of international trade, institutional changes in the economy and structural shifts in production. Before the establishment of the Central Bank of Nigeria (CBN) in 1958 and the enactment of the Exchange Control Act of 1962, foreign exchange was earned by the private sector and held in balances abroad by commercial banks which acted as agents for local exporters. During this period, agricultural exports contributed the bulk of foreign exchange receipts. The fact that the Nigerian pound was tied to the British pound sterling at par, with easy convertibility, delayed the development of an active foreign exchange market. However, with the establishment of the CBN and the subsequent centralisation of foreign exchange authority in the Bank, the need to develop a local foreign exchange market became paramount.

The increased export of crude oil in the early 1970s, following the sharp rise in its prices, enhanced official foreign exchange receipts. The foreign exchange market experienced a boom during this period and the management of foreign exchange resources became necessary to ensure that shortages did not arise. However, it was not until 1982 that comprehensive exchange controls were applied as a result of the foreign exchange crisis that set in that year. The increasing demand for foreign exchange at a time when the supply was shrinking encouraged the development of a flourishing parallel market for foreign exchange.

The exchange control system was unable to evolve an appropriate mechanism for foreign exchange allocation in consonance with the goal of internal balance. This led to the introduction of the Second-tier Foreign Exchange Market (SFEM) in September, 1986. Under SFEM, the determination of the Naira exchange rate and allocation of foreign exchange were based on market forces. To enlarge the scope of the Foreign Exchange Market Bureaux de Change were introduced in 1989 for dealing in privately sourced foreign exchange.

As a result of volatility in rates, further reforms were introduced in the Foreign Exchange Market in 1994. These included the formal pegging of the naira exchange rate, the centralisation of foreign exchange in the CBN, the restriction of Bureaux de Change to buy foreign exchange as agents of the CBN, the reaffirmation of the illegality of the parallel market and the discontinuation of open accounts and bills for collection as means of payments sectors.

The Foreign Exchange Market was liberalised in 1995 with the introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorised dealers at market determined exchange rate. In addition, Bureaux de Change were once more accorded the status of authorized buyers and sellers of foreign exchange. The Foreign Exchange Market was further liberalized in October, 1999 with the introduction of an Inter-bank Foreign Exchange Market (IFEM).

The Nigerian foreign exchange market has witnessed tremendous changes. The Second-tier Foreign Exchange Market (SFEM) was introduced in September, 1986, the unified official market in 1987, the autonomous Foreign Exchange Market (AFEM) in 1995, and the Inter-bank Foreign Exchange Market (IFEM) in 1999.

Bureaux de Change were licensed in 1989 to accord access to small users of foreign exchange and enlarge the officially recognised foreign exchange market. Exchange rates in the Bureaux de Change are market determined. A parallel market for foreign exchange has been in existence since the exchange control era. It has been established that scarcity in the official sector and bureaucratic procedures necessitated the growth and development of the parallel market.

Before 1986, importers and exporters of non-oil commodities were required to get appropriate licences from the Federal Ministry of Commerce before they could participate in the foreign exchange market. Generally, import procedures followed the international standard of opening of letters of credit (L/Cs) and subsequent confirmation by correspondent banks abroad. The use of Form 'M' was introduced in 1979 when the Comprehensive Import Supervision Scheme (CISS) was put in place to guard against sharp import practices. The authorization of foreign exchange disbursement was a shared responsibility between the Federal Ministry of Finance and the CBN. The Federal Ministry of Finance had responsibility for public sector applications, while the Bank allocated foreign exchange in respect of private sector applications.

Increased emphasis was placed on export promotion as a means of reducing pressure on the external sector. The government introduced a number of incentives to boost non-oil exports. These included arrangements for setting up export free zones, concessions to exporters to retain 25 per cent of their export proceeds, the liberalisation of export and import licensing procedures and the provision for the establishment of an export credit guarantee and insurance scheme. Exchange control was discarded on September 26, 1986 in order to evolve an exchange rate mechanism that would better reflect the underlining macroeconomic realities.

The Second-tier Foreign Exchange Market (SFEM) came into being on September 26, 1986 when the determination of the Naira exchange rate was made to reflect market forces. The modalities for the management of the Foreign Exchange Market have changed substantially since the introduction of SFEM, in line with the principles of the Structural Adjustment Programme (SAP) which emphasise the market-oriented approach to price determination.

Within the basic framework of market determination of the Naira exchange rate, various methods were applied and some adjustments carried out to fine-tune the system. A transitory dual exchange rate system (first and second-tier) was adopted in September, 1986. On 2nd July 1987, the first and second-tier markets were merged into an enlarged Foreign Exchange Market (FEM). Various pricing methods, such as marginal, weighted average and Dutch system, were adopted. With the introduction of the SFEM, the Federal Ministry of Finance had its allocative powers transferred to the CBN, but it retained approving powers on public sector transactions.

The constant fine-tuning of the market culminated in the complete floating of the naira on March 5, 1992 when the system of pre-determined quotas was discontinued. The unabating pressure on the foreign exchange market resulted in the policy reversal in 1994. The reversal of policy in 1995 to that of "guided deregulation" necessitated the institution of the Autonomous Foreign Exchange Market (AFEM). Apart from the institution of an appropriate mechanism for exchange rate determination, other measures increasingly applied in managing Nigeria's foreign exchange resources included demand management and supply side policies. The CBN and the government have actively fostered the development of institutions such as the Nigerian Export Promotion Council (NEPC) and the Nigerian Export-Import Bank (NEXIM) in the drive to earn more foreign exchange.

The AFEM metamorphosed into a daily, two-way quote Inter-Bank Foreign Exchange Market (IFEM) on October 25, 1999. The IFEM is expected to broaden and deepen the foreign exchange market on daily basis and discourage speculative activities.

The main objectives of exchange rate policy in Nigeria are to preserve the value of the domestic currency, maintain a favourable external reserves position and ensure external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.

The average AFEM intervention rate which closed at 82.33 to a dollar in 1995 appreciated to 81.48 per dollar in 1996. The rate depreciated continuously to 81.98, 84.84 and 91.83 in 1997, 1998 and 1999 respectively. The rates in the bureaux de change showed similar trend. At the bureaux de change, the rate closed at 83.69 to a dollar in 1995, appreciated to 83.15 per dollar in 1996 before depreciating continuously to 99.26 per dollar in 1999. The parallel market premium moved from 1.6 per cent in 1996 to 3.2 per cent in 1999. Meanwhile, the market determined exchange rate at the IFEM has remained within the pre-determined fluctuation bands.

Following persistent demand pressure in the Interbank Foreign Exchange Market (IFEM) and the rapid depletion of the external reserves, the Central Bank of Nigeria (CBN) reintroduced the Dutch Auction System (DAS) in July 2002. Overall, the Naira depreciated from an average of
N111.9/$1.00 in 2001 to N120.5/$1.00 in 2002 in the IFEM/DAS. With the introduction of DAS, the premium between the IFEM/DAS and the parallel market rates fell from 18.2 percent in 2001 to 13.5 percent in 2002.

The Foreign Exchange Monitoring Decree of 1995 opened up Nigeria's Foreign Exchange Market. Since 1999, significant progress has been achieved regarding the conversion and transfer of funds due to the abolition of Nigeria's formal dual exchange rate and the establishment of the inter-bank Foreign Exchange Market (IFEM), the country's sole official foreign exchange mechanism. Under IFEM, commercial banks, oil companies, and the Central Bank of Nigeria (CBN) could buy or sell foreign exchange at a CBN-influenced rate for specific financial purposes. In late July 2002, the IFEM was replaced by the Dutch Auction System (DAS), which closed much of the gap between the parallel rate and the de facto official rate. Foreign companies and individuals can hold domiciliary accounts in banks and account holders have unlimited use of their funds. On a day-to-day basis, however, banks often lack sufficient foreign exchange.

The Central Bank of Nigeria (CBN) funded the foreign exchange market with about $9.475 billion last year through the Dutch Auction System (DAS).

This amount is 3 per cent or $280 million more than the $9.19 billion used in funding the market in the previous year.

The $9.475 billion recorded last year is, however, 1.9 percent or $184 million less than the $9.659 billion expended in 2001.

Last year's figure is, however, 30.5 per cent or $2.219 billion more than the $7.256 billion pumped into the market in 2000.

In the same vein, last year's $9.475 billion is 94.1 percent or $4.595 billion more than that of 1999 with stood at $4.88 billion.

Since 1995, Nigerian's appetite for foreign exchange has been on the increase. From $1.712 billion in 1995, the amount rose to $1.861 billion the following year (1996) and further to $2.911 billion in 1997. It further increased to $4.248 billion in 1998.

The re-introduction of the Dutch Auction system (DAS) in July 2001 was the saving grace for both Nigeria's exchange rate and foreign reserves as the former had consistently depreciated against major currencies (particularly the dollar), while the latter had been completely depleted following the fall in oil prices at the international market as well as the pressure exerted on the naira as a result of increased foreign exchange demands.

According to THISDAY foreign exchange data, the apex bank sold $1.742 billion in the first quarter of last year, $2. 887 billion in the second quarter, $2.262 billion was sold in the third quarter, while $2.583 billion was sold during the fourth quarter.

A breakdown of the foreign exchange sales pattern in 2003 indicates that $189.90 million was sold in the first week, $201.88 million in the second week while $202.54 million was sold to banks in the third week.

In the fourth week $155.43 million was sold, fifth week $180.19 million, while $338.70 million was bought from the apex bank by banks in the sixth week.

And in the seventh week CBN sold $233.79 million, $170.1 million in the eight week, while it sold $176.46 million in the ninth week.

The apex bank equally sold $208.19 million in the 10th week, while $170.93 million in the 11th week, bringing the total forex consumption at the DAS in the first quarter of the year to $1.742 billion. Compared with the $2.15 billion of the previous year, this indicates an advancement of some 19 per cent or $408 million. This development equally shows that the DAS may have succeeded in curtailing demand during this period.

In the 12th week, which is the beginning of the second quarter of the year, CBN sold $254.84 million; $166.71 million was bought in the 13th week, while $274.36 million was sold in the 14th week.

In the 15th week $174.26 million, while $167.56 million was sold in the 16th week.

In the 17th week $221.1 million was sold, 18th weeks' figure stood at $253.82 million, while $183.17 million was bought from the apex bank by banks in the 19th week.

And in the 20th week CBN sold $149.51 million, sales of the 21st week stood at $241.39 million, while $288.09 million was sold in the 22nd week.

The apex bank equally sold $198.84 million in the 23rd week, $114.62 million in the 24th week, $177.48 million in the 25th week, $253.82 million in the 26th week and $111.7 million in the 27th week which ended precisely on June 26, 2003, the last trading day of the month, bringing the total forex consumption during the second quarter to $2.77 billion.

Interest and Exchange Rates Management in Nigeria: A Macroeconomic Implications
By

Economic theory, in the quest for simplicity, assumes that the exchange rate is any other price and that it is determined by the forces of demand and supply in a perfectty competitive market and in a world where free international exchange is the rule.

An extension of this theory is that such factors as net foreign exchange earning [exports - imports], current account balances, productivity and its growth among others, determine the exchange rate of a currency.

It helps in ensuring international exchange of goods and services as well as achieving and maintaining international competitiveness and hence ensures viable Balance of Payment position.lt serves as an anchor for domestic prices and contributes to internal balance in price stability.

Objectives of Exchange Rate Management
_ The general objectives of foreign exchange policy in Nigeria are basically the same as those of economic policy. The specific short and medium-term identifiable objectives include:

_ To narrow the gap between the official and parallel markets and prevent disequilibrium in the foreign exchange market.

_ Ensuring stability and sustainability of the exchange rate.

_ Maintaining a favourable external reserve position and ensuring external balance without compromising the need for internal balance, while keeping in view the overall goal of sustainable output, growth and employment.

_ Reduction of dependence on imports and oil exports.

_ Diversification of the export base.

_ Elimination or reduction of incidence of capital flight

_ Correcting the sky rocketing Naira exchange rate.

Types of Exchange Rate Management Methods

In our world, the perfect situation described in economic theory does not exist and so we have four major mechanisms for managing/ determining the exchange rate.

_ Monetary unification - integration with other nations e.g., the EU. The power to issue currency is surrendered to the supranatural body and member countries are usually made to align their economies to meet the set conditions, i.e., convergence test.

_ Fixed Exchange Rate system: In a fixed rate regime, the government sets the rate at which the currency will exchange for other currencies. The currency is supported by the government and is usually protected with Exchange Controls. Nigeria practiced this in the 1 980s.

The assumption here is that market failure exists and the forces of demand and supply cannot be trusted to effectively allocate resources in ways that best promote the stated economic objectives. FX is also scarce and must be carefully utilized.

_ Freely floating rate system: Here the external value of the national currency is left to be determined exclusively by the forces of demand and supply.lf demand for the country's currency (represented by the demand for its exports by other nationals) is high, its price -exchange rate -must be high. The reverse holds if the supply of the national currency (which is mirrored by demand for imports the residents of the importing country) is relatively high, the currency will be cheap. Floating Exchange Rate system within set limits or boundaries (dirty float). Here, the government sets the exchange rate with upper and lower limits.

Under this situation, the government sets the exchange rate, but allows some degree of flexibility for rate adjustment. Therefore, the dirty float system tries to combine the features of both fixed and floating exchange rate regimes.

Exchange Rate Management: The Nigerian Experience

Before the introduction of the Structural Adjustment Programme (SAP) in 1986, the country operated a fixed exchange rate regime based on trade and exchange controls, which was anchored through import license controls regime. Between 1986 and 1995, different exchange rate management regimes were introduced by the various governments in power at the time, including a dual exchange rate regime in 1 988, the InterBank Foreign Exchange Market [IFEM] in 1989 and the reintroduction of a dual exchange rate system in 1995. Over this period, the demand for foreign exchange outstripped supply progressively.

The existence of different foreign exchange markets in Nigeria is primarily borne out of the inadequate supply of foreign exchange.

In order to crowd out some requests for foreign exchange, the monetary authorities scrutinize requests to differentiate between productive [genuine) and frivolous demands. Unmet demands are met at the parallel market.

The pressure on the daily Inter-Bank Foreign Exchange Market has continued to be on the increase and this has resulted in the instability of the Naira exchange rate, while the gap between the official and the parallel markets continues to widen.

Problems With The Nigerian Exchange Rate System

_ A critical requirement for a freely floating exchange rate regime is the absence of any form of economic rigidity. The Nigerian economy is characterized by structural rigidities and bottlenecks.Most of our exports and imports are characterised by inelasticity either on the demand or supply side or both.

_ Restraint on the free flow of goods and services by our trading partners. The guidelines of the CBN on the purchase of foreign currency are often cumbersome, causing some frustrated potential foreign exchange users to patronize the parallel market.There is always a gap between supply and demand for foreign exchange.

The Nigerian economy is import dependent. Thus, pressure on forex demand will inevitably create the alternative market, hence different rates.Non-oil export is under-reported and proceeds are hardly repatriated into the country, thus compounding the supply rigidity.

Macroeconomic Implications of Nigeria's Interest and Exchange Rate Management Experiences for the Real sector of the Economy

The real sector is here defined as consisting of the following sectors - Agriculture, Manufacturing, Building & Construction, Mining & Ouarrying.

A review of financial statistics from the World Bank and the Economist reveal that the real sector of Nigeria's economy has been the worse for it. Between 1993 and 1999, the manufacturing sector contributed less than 8% of GDP at 1984 constant factor cost. Interest rates on 2 years' government bonds, corporate bonds and 90 days' money market instruments is at least 4 times higher in Nigeria than in most developed countries of the world [inchding the G-8 countries]. On the other hand, GNP in absolute terms and per capita is lower in Nigeria than in some third world countries such as India, Malaysia, Egypt, Indonesia, South Africa and Israel, to name a few. Even against some African countries, Nigeria's GNP Per Capita is one of the lowest, despite a relatively high GNP. With a GNP per head of US$292, the average Nigerian falls below the international poverty line of US$300 as approved by UNDP. This corroborates the World Bank position that Nigeria's per capital income is currently below the threshold of the Highly Indebted Poor Countries [HIPC]. In general, the macroeconomic indicators reveal that between 1995 and 1999,GDP growth rate was below 4%, industrial capacity utilization was below 40% and change in the exchange rate was as high as 92.8% in 1999. In the external sector, insufficient supply of foreign exchange continues to mount pressures on Nigeria's exchange rate. The stringent documentation requirements in the official market crowds out some forex demands that are ultimately met in the parallel or black market. Thriving malpractices in the parallel market and the documentation requirements of the official market have both contrived to make patronage of the former increasingly attractive and profitable, further discouraging domestic production and worsening Nigeria's balance of payment position. The statistics are damning.

It is clear that Nigeria is in dire need of rapid and sustainable rate of economic growth and development, if we are to reduce the level of human miseries pervading the country.

 Excerpts from a speech delivered at the Inaugural Lecture of the Alumnus Guest Lecture Series of the Department of Economics, Ambrose Alli University, Ekpoma on June 24, Mr. Elumelu, MD/CEO Standard Trust Bank

How to stabilise the Naira, by CBN
By Ayo Ashaolu, Senior Finance Correspondent

Guardian

February 24, 2004

FOR the economy to achieve a realistic exchange rate, the Federal Government must solve the problems of import dependency, capital flight, and lack of motivation for backward linkages in the production process, the Governor of the Central Bank (CBN), Chief Joseph Sanusi, has said.

Sanusi made the call yesterday in Lagos, noting that achieving a realistic exchange rate would result in the simultaneous achievement of internal and external balances and facilitate the achievement of sustainable economic growth and development.

Besides, Sanusi who was the guest speaker at the business luncheon of Nigeria-British Chamber of Commerce held in Lagos added that a realistic exchange rate would also ensure that the Naira is not overvalued in real terms, "and that our external sector remains competitive."

The CBN governor whose paper was titled: "Foreign exchange mechanism, the current Nigerian experience," said that maintaining a realistic exchange rate policy for the naira has become crucial given the structure of the economy, and to minimise distortions in production and consumption, increase the inflow of non-oil export receipts and attract foreign direct investment (FDI).

He observed that with the bulk of the country's foreign exchange earnings dependent on crude oil export receipts, volatility of the world oil market process has continued to have direct impact on the supply of foreign exchange in the country.

Sanusi expressed regret that despite the huge amount of foreign exchange, which the CBN supplied to the foreign exchange market, the impact was not reflected in the performance of the real sector of the economy.

The CBN chief added that as a result of Nigeria's high import propensity on finished consumer goods, the foreign exchange earnings from oil have continued to generate output and employment growth in other countries from which Nigeria's import originated.

This, he said, informed the reason for re-introduction of the Dutch Auction System (DAS) in 2002" when the demand pressure in the foreign exchange market intensified and the depletion in external reserves level persisted."

Sanusi, however, stated that the most critical factor and challenge facing the authorities at the moment remain how to increase the productivity of the domestic economy.

He explained that "the higher the productivity, the less the pressure on the naira exchange rate and its volatility.

"All structural rigidities facing the economy have to be reduced to the barest minimum if it cannot be completely eliminated," Sanusi said.

He, however, said the re-introduction of DAS, has since achieved the objectives of the monetary authorities.

His words: "Generally, DAS has assisted in narrowing the arbitrage premium from double digit to a single digit, until the emergence of irrational market exuberance in the fourth quarter of 2003.

"Secondly, the DAS has enhanced the relative stability of the naira vis-€-vis the U.S. dollar.

"Specifically, the naira has fluctuated within a single digit band, since the DAS was introduced", he added, saying: "Thirdly, it has assisted in stemming the spate of capital flight and curbing rent - seeking amongst market operations."

Earlier in his address, the president of the chamber, Chief Michael Olawale-Cole, said the exchange rate of the naira to major currencies of the world has become a source of worry to all stakeholders in the nation's economy.

He said that unless efforts are made to increase domestic production of goods and services, the ban on importation of certain items will be counterproductive.