Analysts call for scrapping of ‘forex subsidy’ at official market

The consolidation of the foreign exchange market for the enthronement of a unified exchange rate for purchasing foreign currencies will reduce the current pressure on the naira and bring about transparency and development to both the market and economy, analysts say.

The analysts also see the current support for the Retail Dutch Auction System (RDAs) by the Central Bank of Nigeria (CBN) as amounting to subsidy which is being abused and also being enjoyed by a few Nigerians, and therefore should be scrapped.

The establishment of RDAs meant for for subsidising FX for strategic industries, such as making cheaper the import of capital goods that are needed for manufacturing industries that will in turn create employment for the economy, had made the official exchange rate to be at N155/$ since 2011 until last November, when it was moved to N168/$.

But the economy had witnessed the naira depreciating in other segments of the markets, with interbank rate last weekend at N185/$; Bureau De Change, N192 and parallel market exchanging for N192/$, thereby creating arbitrage opportunity that is unhealthy for the economy.

They argue also that the disparity creates room for round tripping as dealers could buy from the official market and sell at the parallel market rate.

The issue was raised by some of the members at the last Monetary Policy Committee (MPC) meeting, where they argued that the only way of reducing pressure is by removing the subsidy on the RDAs rate.

“I have argued consistently for consolidation of our FOREX Markets. Continuing to use the R/WDAS is simply to afford subsidies, unfairly to a section of our population. This segmentation must be removed very urgently. It does us no credit and perpetuates a financial market subsidy enjoyed by a few – very similar to the subsidy on fuel” said Adedoyin Salami, of the Lagos Business School who is also a member of the MPC in his contribution at the last MPC meeting.

Razia Khan analyst with the Standard Chartered bank, London said, “The fact that FX is sold at a lower rate at the RDAS than it is on the interbank market means that there is an implicit subsidy offered to those categories of demand that are able to source FX at the RDAS market.

“The authorities’ argument is that they are only subsidising FX for strategic industries – for example making cheaper the import of capital goods that are needed for manufacturing industries, that will in turn create employment in Nigeria.  However, for as long as a subsidised rate is available under the RDAS, some incentive for the miscategorisation of imports exists.” 

Commenting further in a note to Business Day, Khan said, “More importantly, given the pressures on Nigerian FX reserves, it is not clear that any support to strategic industries should necessarily be provided in this way (by subsidising their imports).  Over time, we expect that the different FX rates will be consolidated, but given the current spread between the two markets (RDAS and interbank), this may not necessarily be an outcome of this particular MPC meeting.”

Samir Gadio, another analyst said, “The RDAS FX window has become much less relevant in recent years, especially following the tighter requirements for participation at the official window introduced last November. We estimate that 70% of imports now go through the interbank market. As such, we are slowly but surely moving towards a unified FX market, although its full implementation will probably have to wait until external conditions improve further. 

At the moment, the CBN probably feels that scrapping the RDAS window and moving to a single unified market in a position of weakness is too premature and may be counterproductive. In addition, the CBN would still have to be the primary provider of USD in the interbank market in the current context.”