BETWEEN THE NEW CBN FOREX POLICY AND THE RISING INFLATION IN NIGERIA
BETWEEN THE NEW CBN FOREX POLICY AND THE RISING INFLATION IN NIGERIA
By:
Nurudeen Dauda
June 26, 2016
nurudeendauda24@gmail.com
nurudeendauda24@yahoo.com
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Those who attribute the continuous increase in the cost of goods and services(Inflation) to the closure of Nigeria’s border lack the basic knowledge of the Nigerian Economy and have at the same time refused to ask those who should know. Have they asked those who understood the market or the Nigerian Economy they would have saved themselves from the tragedy of spreading ignorance and falsehood. Please have the patience and come with me!
Nobody closes the Nigerian border in fact an import-dependent economy like ours which imports simple things; such as: matches, toothpicks, handkerchiefs etc., cannot afford to close its borders. The government also uses the border as its sources of revenue through customs duty payment, as such the government might not have contemplated closing its borders. Had it been the Nigerian border was closed you would not even have seen matches to buy, simply because it is not produce in Nigeria. However, what brings about increase in the cost of goods and services is the fall in the “value” of “Naira” to the “Dollars” exchange from N197 “official rate” to $1 and to N380 to $1 as black or parallel market rate due to the collapse in the price of crude oil from as “high” as $115 per barrel in June, 2014 to as “low” as $27 in January, 2016.However,the price has increased to $51 per barrel now, but Nigeria does not benefit from it due to pipelines vandalism. We are supposed to be producing 2.2million barrel a day but now do less than 1million.
Before the new CBN FOREX Policy we have two (2) FOREX Regimes Rates:(1) Official Exchange Rate at N197/199 to $1 as CBN Rate which was only capable of satisfying the FOREX DEMANDS of less than 20% of those who need FOREX for the importation goods and services and (2) The Black or Parallel Market Rate which was about N380 to $1 which was capable of providing about 80% of the Importers’ FOREX DEMANDS. However, majority of the importers of goods and services used the Black Market Rate of N380 to $1 and thereafter import goods and sale to the general public while the only less 20% that got the CNB Rate of N197/199 then were importers of Petrol, Kerosene, Diesel, Aviation Fuel, and Pharmaceutical products. The importers of basic goods and services before now got their Dollars from the Black Market Rate of about N380 not N197/199.
The new CBN FOREX policy has led to the collapse of Black or Parallel Market Rate of about N380 to N335 to $1 (A reduction of N45 per Dollar). On the other hand, the CBN Rate of N197/199 to $1 has stopped. However, the Policy which is purely Market driven using the Thomson-Reuters Order Matching System as well as the conversational Dealing Book has shifted the new Exchange Rate to N283 to $1 at the First trading day(20th June,2016). It is important to note that, the new Rate at N283 to $1 is capable of providing 100% needs of all our importers (including those that formerly bought at N380 to $1 at the Black Market Rate). This will also enhance revenue allocations to the Federal Government as well as states.
However, what has happened under the new regime is that IMPORTERS of goods and services will have Dollars at N283 as against the Black Market Rate of N380 that they used to get before the new policy (This means a reduction of N97 per Dollar). On the other hand, analysts have predicted that the actual price of Naira to Dollar in the new Market Driven Policy is about N250 to $1 and if that subsequently happens there will be a reduction of N130 to $1.
As IMPORTERS begin to buy Dollars at new rate of N283 and or N282 as against the N380 to $1 that they previously bought, the prices of goods and services ought to reduce in the next one (1) month when the new products that would be imported by the relatively Cheap Exchange Rate compare to the immediate past rate arrived the country.
Before the collapse of crude oil price from as “high” as $115 per barrel in June, 2014 to as “low” as $27 in January, 2016, CBN supplies “Dollars” to both the Commercial banks and the Bureau De Change at the official rate after which they sold it to their customers. However, it is important to note that, CBN does not produce or print “Dollars” as it is only printed in the United States of America. CBN gets the “Dollars” through the sales of our export commodities (95% of which is from crude oil) at the international market which uses “Dollars” as the trading currency. Our crisis began when the sources of our dollars supply reduce with about $88 per barrel while “Demand” for “Dollars” remains constant.
May God bless Nigeria!