THISDAYonline

Governor of Central Bank of Nigeria (CBN), Chief Joseph Sanusi, has explained why the Inter-bank Foreign Exchange Market (IFEM) was dumped the Dutch Auction System (DAS) in determining the exchange rate of the Naira.

Speaking at the First Annual Capital Market Conference held last week in Lagos, Sanusi explained that that the Inter-Bank Foreign Exchange Market (IFEM) introduced in October 1999 had failed because it was in recent years characterised by sharp practices by banks.

Sanusi at the conference organised by the Securities and Exchange Market (SEC) disclosed the interest of the Nigerian people will be best served by an exchange rate policy like DAS which according to him, makes the economy competitive both locally and internationally.

Speaking further he added that IFEM was also characterised by persistent and speculative demand pressures and multiple exchange rates, with the concomitant substantial drain of the country's external reserves.

"It was apparent that there was so much malpracticies because the exchange rate was subsided and there was an intrinsic rent which was exploited by banks through arbitrage" Sanusi explained.

On DAS, the governor explained that the system does not give room for distortions, speculation opportunity and sharp practices which he added were inherent in the IFEM.

"I must warn, however, that in exchange rate management, there are no miracle solutions. Whatever regime is adopted is bound to be defective over time as the passage of time will reveal its strengths and weaknesses. The critical factor is that the productivity of the economy must increase. Exchange rate policy is dynamic and must be reviewed from time to time."

But Sanusi listed the achievement of DAS within the few weeks of its introduction. "For now, with the introduction of the DAS, we have succeeded in minimising the inordinate appetite for foreign exchange demand as consumers are now required to pay at their respective bid rates.

"Furthermore, the arbitrage premium - the incentive for round-tripping - has been substantially reduced. The parallel/black market for dollars will, however, persist if the activities of tax-dodgers and impostors who avoid tariffs through non-documentation are not curtailed" Sanusi explained.

The CBN Governor also called on the Custom services more effective in inspection at the ports "Custom Services must respond forcefully through an effective 100 per cent inspection. "If the policy is sustained and complemented by prudent fiscal policies, DAS is expected to address substantially the problems of foreign exchange speculation, capital flight, massive importation of finished goods and the unwholesome practice of dumping"

He however assured that the system would succeed noting that the apex bank was ready to play its role. "We remain optimistic that the system will succeed, as the CBN will play its role with all sense of responsibility and expect all other stakeholders to play theirs in the overall interest of our national economy"

He expected that the outcome conference tagged "Nigerian Capital Market and Globalisation Challenge" would put the financial markets on a higher leverage to take advantage of the benefits of liberalisation and globalisation.

Sanusi who was a former Chief Executive of SEC (in 1978) and between 1972 and 1977 the Secretary of Capital Issues Commission (CIC) an institution that metamorphosed to SEC said the tight monetary policy in the country was an opportunity for the capital market to grow.

"A tight monetary policy with consequent high interest rate as we have witnessed in Nigeria in recent years is an opportunity for the capital market to grow, not necessarily in terms of higher prices of the existing stock, but by inducing creditable companies to approach the market to raise new funds for investment as a reaction to the banks high cost of short term funds.

Investors, according to Sanusi, took advantage of the tight monetary policy in the last three years to patronise the Nigerian capital market, noting that this is shown by the trend in the value of new issues which increased from 43.3 per cent in 2000 to 113.9 per cent in 2001.

"Let me add at this point that the major factors which drive the capital market are a country's economic fundamentals which are anchored on a sound financial system, macroeoconomic stability and a productive real sector.

"We in the Central Bank of Nigeria have laboured over the years to ensure banking soundness and stable macroeconomy, through the use of appropriate monetary and exchange policy instruments while advocating fiscal prudence. The objective is to ensure the efficacy of the financial markets and promote public confidence in the economy" the CBN governor stated.

Sanusi challenged operators in the capital market to seize the developments in the money market to develop new financial instruments.

"The adoption of flexible interest rates and exchange rate regimes are providing market participants with incentives to develop new financial instruments and techniques in order to remain competitive. The Nigerian Capital Market constitutes an integral part of this process.

"The financial market plays a pivotal role in mobilizing financial resources from the surplus units and channeling them to the deficit units for productive investment, thereby facilitating the growth and development of an economy. The widespread programmes of financial liberalisation and advanced technological innovations, particularly in the fields of data processing and telecommunications have broken down barriers of national boundaries and facilitated massive international capital flows" Sanusi added.

The two-day conference attracted major players in the financial sector and capital market in particular. They included Director-General of SEC, Mallam Sulyman Ndanusa, Director-General of the Nigerian Stock Exchange (NSE), Dr. (Mrs.) Ndi Okereke-Onyiuke and other key players in the market.

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.