CBN Forex Intervention

It is no surprise that the somewhat stability of the forex market in Nigeria is as a result of the interventions by the Central Bank of Nigeria (CBN). If it were left to the market forces of demand and supply, then trust me, the rates could have reached a high of N700 to a dollar by now. So news reaching me today is that the CBN yet again carried out another intervention with a sum of US$250 Million. The breakdown of the intervention fund is as follows: The wholesale sector was allocated US$100 million while the Small and Medium Enterprise window received a US$80 million boost. The remainder of US$70 were apportioned to address needs such as the Business and Personal Travel needs (BTA / PTA), school fees and medicals and other such needs requiring foreign exchange.

At the time of writing, the foreign exchange has been stable hovering around the 362 – 368 naira to a dollar mark. It is currently buying at N365/ US$1 and selling for N367 / US$1 in the parallel market. The argument by investors is that there are too many interventions and the CBN might be using the interventions to manipulate the exchange rate so it does not depict the actual value of the currency. This interventions also show that CBN may not only be the major seller of the foreign exchange, it might in the real sense be the only significant seller of the foreign exchange as the whole market is dependent on their interventions. This in the long run will not augur well for the country as it indicates that the country is a net importer and if the price of Oil, the major source of revenue for the government falls, then there is a possibility that the foreign exchange market in Nigeria would be destabilized as the government would desist from its regular interventions so as not to eat into the foreign reserves of the country.

To solve this, we need to diversify into other commodities or exports in order to generate more foreign exchange to cater to the local demand for the FX. In order to make this possible, the government needs to provide a conducive environment to businesses and also help reduce the cost of doing business. One way they can achieve this is by the government tackling the problem of erratic power supply. If they can at least ensure 85 percent power daily, then a major load is taken off the backs of companies as some companies spend as much as 18 percent of their profits purchasing diesel to run their business. Also, the government would need to provide other infrastructures like good water supply and water treatment, roads, bridges, airports etc. to encourage multinational to establish in the country. The multinationals can then come to Nigeria and possibly produce goods or services that can be exported for foreign exchange. The foreign exchange is then recycled as the multinational sells some of its receipts off to fund business activities In Nigeria.