Should CBN Be Intervening In The FOREX Market? Financial Experts Speak

Dr. Ayo Teriba, CEO of Economic Associates
Already, the CBN has allowed the interplay of demand and supply to determine the value of the naira. It did that last month. But, you cannot ask any central bank not to intervene in a foreign exchange market either as a buyer or a seller. Central banks intervene in the foreign exchange market and the treasury bill market.
What is wrong is to fix the exchange rate and refuse to create room for market forces to have their way. The CBN, right now, is not the sole seller of foreign exchange. It bids with other operators; you cannot say it should not do that. If it has a reserve to sell, it should go ahead and sell.
The apex bank has repeatedly said that it has allowed for flexibility to come into play. Sincerely, it has. So, we should believe what it said.
Yinka Oyinlola, a former executive of World Bank
Implicit in the question are two fundamental assumptions: the first is that the ‘market’ regulates prices in a rational manner while the second is that economics and its derivative policies are an exact science devoid of other institutional and contextual variables. I believe that these two assumptions are erroneous because two plus two may not necessarily be four in social science, which economics also belongs to.
While acknowledging that the pull of demand and the push of supply create price equilibrium, markets do tolerate other exuberances by players, hence the need for regulatory institutions.
As a social science, Economics follows a logic that is contextual, institutional and human. Consequently, the market – a panacea for economic growth – needs to be contextualised. The state of Nigeria’s economy requires minimal interventionist approach, especially so that we do not experiment with a somewhat new policy that has never been tested.
I do not believe, however, that the new flexibility in the forex policy means that the CBN determines the value of the naira.
Rather, the CBN intervenes when necessary to prevent volatility in the forex market. It has been proved, in the last 18 months or so, that it is not sustainable for the CBN to fix forex rate.
Each country develops at its own pace and the timing of a universal “best practice” policy varies from country to country.
There is the bigger question of the role of the government or the market in the determination of price – talking about free-trade/laissez-faire policy prescription. The reality is that today’s developed countries used a very few of the policies and institutions they recommended to developing countries.
For instance, Britain and the United States used aggressive interventionist policies in the early stages of their development. It was only after they achieved “supremacy” that they started adopting laissez-faire policies.
Prof. Simon Irtwange, President of Chartered Economists of Nigeria
When there is a pegged exchange rate, it means there is a divergence between the official and parallel rates. What that does is that it creates an opportunity for people to get money at the official rate and trade it at the black market. This is how it works; if I get foreign exchange at the official rate to import goods, I may find it more profitable to trade it at a Bureau De Change and get quick money. In that case, those who have access to it at the official rate are those that make money. In that case, some people will be making a lot of money without doing anything – they don’t import, produce or render any service.
Considering this abuse, it is better to allow the market to determine the value of the naira. There is no reason the official rate should be different from the parallel market rate. There should be a level playing field for all operators.
The CBN should only intervene in the market when things are going out of control. But government should rather make policies to minimise the intervention of the CBN. The risk associated with a fully-deregulated market is that if the market goes haywire, prices of goods will hit the roof. This is because of the peculiarity of the Nigerian economy, which is largely driven by the dollar. Anything that affects the dollar affects the prices of goods.
For the purpose of stabilising general prices, the CBN should intervene occasionally. But in doing that, it must not create the opportunity for people to make money without engaging in production. What is appropriate is to create a threshold; the apex bank should intervene immediately the market exceeds its limits.
Bismarck Rewane, Managing Director of Financial Derivatives Company Limited
Market should be allowed to operate freely. But the CBN should intervene to curb excesses and supply shortfalls. There is nowhere in the world where you have a free market.
What happens is that the regulatory body allows the market to find its equilibrium.
Then, it intervenes with the resources that it has when there is a shock in the market.
For instance, if there is a panic and the naira tumbles, the CBN is expected to intervene to protect the local currency. This is because what you have after the panic may not be the true value of the naira.
As long as the intervention is not done arbitrarily to maintain an artificial value, there is nothing wrong in doing that. We should allow the market to determine the true value of the naira.
When the price does not reflect its true value, there should be an intervention to ensure that resource allocation is not negatively distorted.
That is why the current template is called managed floating regime.
The CBN manages the float to ensure that it does not get out of control. It is a hybrid of flexible and rigid market.
Prof. Sheriffdeen Tella, an economist at the Olabisi Onabanjo University, Ogun State
It is only in Nigeria that a central bank hawks foreign currencies. That is not what the CBN should be doing. It should inject or withdraw from the market – depending on the level of supply. The value of the naira is a reflection of the productive capacity of the local economy.
It is only in Nigeria that people consume what they don’t produce and produce what they don’t consume. We produce raw materials and send them out because we “want to earn foreign exchange.”
When you buy almost everything you need as a nation, your currency would be weak. That is why the naira would crash further.
So, the CBN could intervene in the market as it is done all over the world. But it must do that discreetly. It should stop the buying and selling of foreign exchange but intervene when the need arises.
We would not have been in this mess if we had managed our economy well. The situation will continue until we start producing locally rather than importing everything we need from overseas.
We must also ensure that whatever we buy from outside is properly documented. We should not engage in lavish spending.
A lot of things must be put in place before we expect stability.
Kunle Ezun, currency analyst, Ecobank Nigeria
The central bank is a player in any managed float system. So, you cannot say the CBN should not participate in forex market. The question should be how frequent should it intervene in the market.
For a market that is liquid, the central bank should intervene once in a while. In other words, the forces of demand and supply should drive the market.
As it is today, it is expected that the CBN continues to come in once or twice a week. This should continue until foreign investors start participating in the market.
Victor Ogiemwonyi, President of the Association of Issuing Houses of Nigeria
The current forex market regime is expected for a short-term basis. The CBN is leading a market reform.
It represents key market participants and infrastructure that are currently absent.
I believe the regulatory body will have no major role to play in the market once the system stabilises.