Of Exchange Rate Mechanism, Exchange Rate and Devaluation


Saturday, May 14, 2016 2.43PM /By Etubom (Dr.) Anthony A. Ani MON, OFR, FCA, PP


Being the full text of a keynote address titled “OF EXCHANGE RATE MECHANISM, EXCHANGE RATE AND DEVALUATION” presented at the induction ceremony of new members of the Institute of Chartered Accountants of Nigeria (ICAN) on Wednesday, May 11, 2016.



I wish to thank the President and members of the Council of our Institute for inviting me to be the special guest of honour of the 57th induction ceremony of the new member of the Institute of Chartered Accountants of Nigeria. I also wish to congratulate the new inductees. Today 11th May, 2016 marks your march to greatness. This is the because with Nigeria’s population standing at 180 million people there are 180million vacancies waiting for about 40,000 Chartered Accountants including you the new inductees. This translates to about 4500 vacancies for every living Chartered Accountant and this is where your greatness starts. The world is at your feet but greatness requires hard work, perseverance, personal initiative and strict adherence to the ethics of our profession – accuracy and integrity. You will all succeed.


I also wish to specially congratulate the ladies being inducted today. Women have come a long way in the profession. When in April 1978 I inaugurated the Society of Women Accountants of Nigeria (SWAN), there were only 264 women made of less than 100 Chartered Accountants and 164 Trainee Accountants. Today we have are more than 8000 women Chartered Accountants and more than double number as Trainees. Those of us who encouraged the training of women accountants feel vindicated and I must mention here - Chief Mrs. O.O. Olakunrin, Mrs. I.M Osiyemi, Princess Nike Adeniran, Mrs. Elizabeth Adegite and a host of other men and women who pioneered the training of women in the profession.


I was asked to deliver a keynote address lasting 25 minutes on a topic of my choice about the profession or the economy. I have chosen the topic “Of Exchange Rate Mechanism, Exchange Rate and Devaluation” because exchange rate has an impact on every Nigeria citizen young or old, man or woman. We are an import dependent nation and since exchange rate is the price of our currency in terms of the dollar which we use to pay for our imports, it must impact on the economy, Apart from this, our exchange rate has moved from $2 per N1 to N199 to $1 between 1985 and 2016 yet, the IMF, United States of America and other international Banks have urged Nigeria to further devalue our Naira. Even nearer home, recently the immediate past President of ICAN has added his voice to the devaluation of the Naira.


I hold the view that our Naira is even undervalued and should not be devalued. President Buhari should continue to resist the pressure to devalue. There is nothing to gain from devaluation since we do not export anything significant except our crude oil. Any devaluation will further worsen our economic situation and will send the cost of all our imported goods to the skies. Already, our imports are the most expensive in the world.


Nigeria was removed from the community of nations that adopts letter of credit for its export business and as a result no bank in Nigeria (not even our CBN) can operate letters of credit. We have to do this through correspondent banksand this means paying for our imports upfront with the attendant commission, fees and interest charged by the correspondent banks. A devaluation in addition to the ban on letter of credit will greatly increase the cost of imported goods.





The central policy instrument in most economic programs is the exchange rate. It is a key policy variable in the realignment of currencies and relative prices also in developed economics. A viable, stable and realistic exchange rate through impact on relative prices acts as supply incentives for needed adjustment in production structures, ensures judicious use of resources, attracts capital inflows and directs other foreign exchange transactions from parallel market. A good exchange rate mechanism therefore augurs well for price stability and international trade.


Many countries have faced difficulties to maintain exchange rate mechanism. We remember vividly the collapse of the British exchange rate mechanism (ERM) in the 1980s and this caused a lot of problemsfor the world economy. The Asian Tigers (Philippines Malaysia, Singapore, Indonesia) tried in the late 1990’s to set up an exchange rate mechanism in order to enhance trade between their countries but this collapsed after the destructive intervention of a George Soros working for the Bretton Woods Institutions. As for the United States, the dollar is always the dollar and cannot be affected by any world economic turbulence. The dollar is protected to such an extent that the developing world must restructure their economies and devalue their currencies so as to protect the dollar. In so far as the US is concerned the currencies of the developing economics are always over valued and must be devalued vis-à-vis the dollar. The onlycurrency that has overcome overvaluation from the point of view of the US is the Chinese Yuan for which the US is now seeking a REVALUATION just because the Chinese exports to US are cheap. On this basis when all world exchange rates collapse the dollar will be the only currency standing.


In Nigeria, between 1995 and 2003, we tried to build and maintain a realistic exchange rate mechanism and develop a viable and stable exchange rate but our efforts were thwarted by the International Monetary Fund (IMF) when (as you will find out in later pages)as a conditionality for debt forgiveness, it forced the country to change its policy and depend on commercial banks for our exchange rate management. This is precisely the cause of our present predicament in the wild and inappropriate exchange rate of N350 to one US dollar in the parallel market.



Nigeria adopted the structural adjustment programme on 29th September, 1986 and the Second – Tier Foreign Exchange Market (SFEM) was introduced. This effectively heavily devalued the naira. We tried all sorts of auction – Dutch, English American etc – of our meager foreign exchange but the banks, their directors and managers were making the profits and things came to a head by November, 1994. The banks were selling the Naira bought at SFEM price of N22 to the dollar to the end users, and manufacturers at N128 to the dollar. Inflation was galloping of 88% and interest rate was 30%. There was serious price instability as salaries and wages were not aligned to inflation rate or the parallel market exchange rate. There was discontent in the country and the security of the nation was threatened.

A full meeting of the National Society Council (NSC) was called sometime in November 1994 at which the acting Minister of Finance (Chief Ani) the Governor of CBN (Dr. Paul Oguwuma) and the Chairman of National Economic Intelligence Committee (NEIC) Prof. Sam Aluko were in attendance. The security situation pertaining the price instability and the exchange rate of parallel market which adverselyaffected very house hold in Nigeria was brought to our notice and the three of us were asked to find a solution to the problem. We were in fact excused to go and find the solution. The three of us looked at the macro-economic variables and found that there was over-liquidity of Naira in the banking system as a result of excess profits made by bankers by selling the weekly allocation of dollars at SFEM at N22/$1 for N128 for $1 at the parallel market.


This liquidity must be eliminated to reduce instability and inflation in the system. We also come to the conclusion that we must crash the parallel market by all means but this was problematic. The problem was that the foreign reserve of the nation was less than two weeks of export and less than one billion US dollars ($1billion) and it will not be sustainable to crash the parallel market rate (N128/$1) to the SFEM rate of N22/$. The second problem was that Nigeria had been removed from the community of nations operating the letter of credit system so that all our imports musts be paid upfront through correspondent banks. This meant that the 90 days credit granted to importers was denied to Nigeria and this had to be taken into consideration in the utilization of our foreign reserve.


The third problem was that most of our banks were owned by families or individual Nigerians and were all deposit takers. A further analysis of the individual owners of these banks showed that they were from six or seven states of the federation. We should not allow the stability of the country (through exchange rate manipulation) to remain in the hands of these few individuals and this meant that the CBN must play a central role in participating and monitoring of the foreign exchange market.

At the end of our deliberation (Ani/Ogwuma/Aluko) we agreed that for the parallel market to crash, the CBN must fund the real sector of the economy for its foreign exchange needs while the banks should fund the other sectors. We also agreed that banks should source for their own foreign exchange and all other windows in the foreign exchange market should be shut. We concluded reluctantly that in view of our meager external foreign reserve (less than $1billion)and our removal from the world credit system, an exchange rate of $80-82 to the naira with N2 overage will be sustainable but we should make production and productivity our watch word.
We returned and reported our recommendation to the National Security Council; this was accepted and we were asked to implement immediately.


On the next working day the CBN abolished SFEM; all importers of raw materials and real sector operators were asked to source for their forex directly from CBN at N80 to $1 and we were able to force the parallelmarket to crash to $82/$1. At the Ministry of Finance we extrapolated the expected crude oil revenue for 1995, 1996 and 1997 and found that the net expected foreign exchange inflows will be low and will not be able to support the exchange rate of N80; $1.


A scrutiny of the nation’s sources and application of collectible dollars in previous years showed that not much was coming from the proceeds of non-oil exports and the remittances of Nigerians in diaspora was nil. On enquiry, we were informed that as regards proceeds of non oil exports which were done by Asiatics, all our exports were falsely found to be substandard and were said to be usually dumped into the sea whereas in-fact these exporters sold and retained the proceeds abroad.


As regards remittances, our tax laws, which imposed tax on all income “brought into” Nigeria prevented Western Union and Moneygram from dealing with Nigerians in diaspora. In respect of our crude oilexports it was proved that the meters at the flowstations were not functioning for years with the result that ships were over loaded with nation’s crude oil for which no payments were made. We had come to the conclusion if our new exchange rate was to be sustained, we must seal all these loopholes so as to open up significant capital inflows. Also we mustreduce heavy dependence on the imports particularly food and petroleum products.




At the Ministry we drafted the following laws

i.                    Nigeria Investment Promotion Act, 1995 (Ani/Mrs Rahmon). This was one of the trilogy of economic laws targeted at the medium and long term investors guaranteeing their investments in Nigeria. It also repealed the Nigeria Enterprise Promotion Act 1972. It was also targeting Nigerians who had stashed away the nation’s money in foreign Banks, estimated at about $ 400 billion.


ii.                 Foreign exchange (Monitoring and Miscellaneous Provision) Act 1995 (Ani/Mrs Lashman). This law introduced the Autonomous Foreign Exchange Market (AFEM) and its rules of engagement. It was the second of the trilogy of economic laws targeting foreign investors and Nigerians with large funds abroad and it reintroduced foreign currency domiciliary accounts.


iii.               Pre-shipment Inspection of Exports Act 1996 (Ani/Mrs Lashman). This law required that all our exports must be inspected for quality and quantity and once so certified, the exporter must open a letter of credit in favour a Nigerian bank. This beat the Asiatics to their game as inflows from our non-oil exports started boosting our earnings. This law also provided that all our crude oil shipments at the terminals must be inspected using the topping and dipping method and we drastically reduced the stealing that was going on at the flow station.


iv.                We amended our tax laws (Ani/Naiyeju)in 1996 so that certain remittance brought into Nigeria were to be exempted from tax. Thus by August, 1996, Western Union started operating to Nigeria through FirstBank while Moneygram operated through UBA. The inflows from this source stabilized our exchange rate mechanism and remittance from Nigerians in diaspora amounted to $21 billion in 2015.


v.                  There was the Petroleum Trust Fund law 1995 (Ani/Aminu Saleh with inputs by Gen Buhari). This law introduced the interventionist Petroleum Trust Fund. It was to be funded from the sale of petroleum products at N1.5 per litre from the sale price of N11 per litre throughout the period. It was a very well managed fund which impacted positively on all Nigerians. The law also ensured that Nigeria produced its petroleum products locally and all the refineries produced at optimal capacity. We did not import petroleum products except for a few weeks when some unscrupulous Nigerians imported toxic fuel from Belarus. This was stopped immediately. On the whole all our refineries were well maintained and whenever we had to repair any of them, adequate arrangements were made with foreign refineries that had excess capacity and they refined our domestic crude. In addition to sending us refined products, we also received large amounts being the proceeds of sale of by-products. We never swapped our domestic crude for finished products.





These were some of the laws drafted at the Ministry of Finance. There were other laws drafted at the ministry at the initiative of the author of this paper and this will be the basis of future discourse. Suffice to say that with the introduction of these laws, the foreign inflows of funds into Nigeria stabilized our exchange rate and the Naira was virtually convertible. Anyone could walk into the bank with N82 and buy $1. By 1997 our external reserve stood at $ 7 billion, our exchange rate had been stable since 1995 and we were talking of the convertibility of the Naira. At the Ministry in 1998, we commissioned the Nigerian Economic Society (of which the Ministry had been admitted as a member) to carry out a study on the convertibility of the naira. We were advised to do the internal convertibility (like Saudi Arabia) and go for Article IX consultation with the I.M.F.





Another important area I want to discuses is that as the CBN was selling its foreign exchange directly to the real sector, it was making a profit of N58 per dollar. We had mopped up the excess liquidity in the system when the banks were buying the dollar at N22 and selling at N128. Now the CBN was awash with naira which we made use to balance our budget. Throughoutthe period from 1995 to 1998 we did not borrowinternally or externally. Also, the profit made by CBN on forex trading was used to build the GwarimpaHousing Estate, the biggest housing estate in Africa.We did not borrow to build this estate. Coming nearer home sometime in 1996/97 the Vice Chancellor of University of Ibadan and the Chief Medical Director of University College Hospital Ibadan came to inform methat their institutions had no water. I was very concerned and after due consultation, it was decided that the two institutions should not only have water but their water works should have excess capacity so as to supply water to some parts of Ibadan (in case of need). The water scheme was funded from the forex profit. Before the introduction of AFEM, all this profits went into the pockets of the banks and bankers.





Our exchange rate mechanism was in good shape and we maintained a stable exchange rate until 2003 when we applied for debt cancellation and the IMF/World Bank gave Nigeria terrible conditions which we accepted to our own detriment. At the ministry, we had done a lot of work on our external debt profile, its analysis, determination and verification.


In February 1995, I had visited the Paris Club Office in France where I had proposed that we make a once and for all payment of $ 7 billion in full settlement of our Paris Club debt spread over 5 years with nil interest and they were very excited of the proposal. By 1996 we had started the analysis and verification of the entire Paris Club debt courtesy Wurburg Investment, Bankers. Unknown to many, Wurburg maintained records of the details of all our debts and Bashorun J.K Randle FCA was able to obtain these record for me. We were able to identify the unpaid balance of every dollar we borrowed, the interest, fines, penalties, interest on interest and re-schedulement interest.


By the time this analysis was completed we found that the dollar content of our original Paris Club debt was not very significant. It was during the exercise that we discovered “failed projects” i.e projects that were never executed but the proceeds of external loans obtained for their execution were in all case drawn. There were 18 of these projects amounting to about $ 1 billion. Some of these failed projects had been subject of public enquiries in the past especially between 1984 and 1985. We reported this matter to Mr Camdesus and Mr. Bill Wolfson the MD and President of IMF and Works Bank respectively but they insisted that Nigeria must pay for the debts. The Government insisted that rather than pay we should go to the courts.


We ended up paying these debts during the debt cancellation exercise. During the debt verification exercise with our creditors, we sensitized these creditors who were prepared to give us 75% to 80% discount. As a matter of fact Switzerland that we were owing $ 154.4 million accepted our offer (through a third party) of $40 million. We were going to seal the deal when IMF wrote to the Paris Club creditors not to deal with Chief Anthony Ani or his agents.





With the above, what transpired was that the debt cancellation exercise was not a big deal. We paid about $ 12 billion for what should not be more than $ 7 billion. The whole Paris Club thing was a debt trap to enforce structural adjustment programme on developing nations and they used economist from developing world, trained in North American Universities for this enforcement. The debt cancellation exercise of 2003 destroyed our exchange rate mechanism as one of its conditions was for the CBN to abdicate its responsibilities as the central player in the Autonomous Foreign Exchange Market(AFEM).


A wholesale/retail Dutch auction system was introduced. CBN abandoned its role of dealing with the real sector and transferred this responsibility to the commercial banks. Bureau de Change (BDG) to befunded by CBN will trade hand in hand with commercial Banks. At the last count there were 3000 BDGs owned by bankers, legislators, politicians all funded at the rate of $ 60000 per week by the CBN.


With this development, the banks had a field day. Few families or clans from six state of the Federation took control of forex market and the rest is history. These banks were selling the foreign exchange at their own prices at super profits. There was so much liquidity in the banking system. The profits we used to balance our budget or build estates like Gwarimpa were now in the pockets of few individuals and gradually the naira was being devalued in the parallel market to the extent that the naira was over devalued.


It came to point that the Naira was consistently devalued by the Government; from the date we announced the minimum wage, we devalued, each year when preparing our budget we will devalue, we even devalued when the new Governor of CBN was appointed, his welcome action was to devalue and increased the interest rate. There was never production or productivity to accompany any devaluation. Even with the heavy inflows from remittance of $21 billion in 2015 our exchange rate has gone hay wire due to the following disturbances in the system.





With the creation of over 3000 BDGS owned mostly by bankers, governors, members of national Assembly and politicians there were serious outflows of forex from the system at $ 60,000 per week per BDG. Also the issuance of credit cards authorizing individuals to withdraw $ 150, 000 per year per card worsened the outflows. It is known that some Nigerians owned as many as 100 of these cards and this had an adverse effect on our exchange rate mechanism.





In 2006/2007 the CBN authorized bonds issued in naira with interest paid in Naira to be traded in Emerging market basket by J.B Morgan. It will be recalled that the interest rate on European bonds are very low and it paid J.P Morgan clients to invest in Emerging market local currency bonds so as to earn higher interest and Nigerian Naira bonds were so traded and the proceeds earned in dollars retained by Nigerian banks. In time of exchange rate volatility J.P. Morgan asked Nigeria to devalue its currency so as to accommodate its clients. There was no justification whatsoever for this as Nigeria cannot be expected to pay for “speculation risk” by J.P Morgan’s clients.


The MD of IMF Mrs. Lagarde of course joined forces with J.P Morgan to force Nigeria to devalue and now the US Government has joined Mrs Lagarde to ask Nigeria to devalue or at least make its exchange rate flexible. President Buhari has resisted these pressures for which I congratulate him. Nigeria should never have gone into J.P Morgan Bond market with our Naira denominated bonds in the first place and it was an insult for a Bank to even suggest that Nigeria should devalue with IMF backing.



Remittances from Nigerians in diaspora ($ 21 billion in 2015) and repatriation of export proceeds were the very important ingredient in the stabilization of the exchange rate mechanism. We bring the money into Nigeria via Moneygram and Western Union. In August 2014 CBN introduced Outbound Money Transfer Service and authorized Moneygram and Western Union to re-export remittances in trenches of $5000 per transaction to Nigerians abroad on payment of the Naira equivalent at the CBN rate of exchange.


There is no doubt that this scheme is to mop up the excess liquidity or profits made by banks in respect of their foreign exchange transactions and Nigeria is the only country in the world re-exporting it remittances. It is relevant to note that the naira is not convertible but remittances which are meant to stabilize our exchange rate are re-exported. This is the cause of the scarcity of the dollar in the market and the cause of the worsening depreciation of the naira in the parallel market.


The Outbound Money Transfer Service must be stopped and all remittances retained to stabilize the exchange rate mechanism.


1.       All the excess liquidity in the banking system arising from foreign exchange operations should be mopped up and retained by the Central Bank at zero percent interest. This amount may be used for development while being retained by the CBN.


2.      The CBN must continue to play the central role in the Autonomous Foreign Exchange Market. The CBN must fund the real sector of the economy without exception for its foreign exchange requirements. Any prohibition should be done by tariff adjustment. Commercial banks will fund the other sectors.


3.      All foreign exchange earnings in respect of for the nation’s oil and gas operations will be retained by the CBN while remittances and non oil imports earnings will be retained by the commercial banks for their operations at AFEM.


4.      The CBN must allow the Bureau De Change (BDG) to operate on its own and must stop funding them. All their deposits should be returned to them.


5.      The parallel market rates must be crashed and a more realistic and sustainable rate ascertained for the Naira with an overage of not more than 2%.


6.      Nigeria must find its way back into the community of nations operating letters of credit. A situation where we operate through correspondent banks makes our imports to be expensive and have adverse impact on the generality of Nigerians.


7.      Our motto should be Production! Production! Production!!! We must repair our refineries and produce all our petroleum product needs. We must produce our food requirements. We must diversify our economy. 


8.     The re-exporting of remittances from Nigerians in diaspora must stop. CBN must rescind and repudiate the Outbound Money Transfer Service as this is the window for the re-export of remittances.


9.      The CBN should enter into wider consultation with the Minister of Finance and the Minister of Planning before introducing schemes that appear to authorize capital flights and disgrace to the nation. The schemes of dealing in naira denominated bonds with J P Morgan and Outbound Money Transfer, are shameful and unacceptable.


I submit that neither devaluation nor flexibility of the exchange rate is the answer to our problems. Our exchange rate mechanism was destroyed when we were cajoled into debt cancellation programme. We must restore this mechanism and adopt a realistic exchange rate. We must make the naira to be internally convertible again; we must realize that the naira had in the past been over-devalued with no corresponding production or productivity to follow. I hold the view that Nigeria must not devalue and that President Buhari is right in resisting devaluation.


Thank you.


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