X-Raying The Implications Of CBN’s Closure Of RDAS/WDAS On The Economy

Late February, the Central Bank of Nigeria CBN closed two public auction structures popularly known as Retail Dutch Auction System RDAS and Wholesale Dutch Auction System WDAS. In a statement signed by its Director, Corporate Communications Department, Mr. Ibrahim Muazu, it listed some unprincipled market behavior that compelled it to take the decision to include round tripping, speculative demand, rent-seeking, spurious demand and inefficient use of scarce foreign exchange resources by economic agents.

The statement further directed that all demands for foreign exchange should be channeled to interbank foreign exchange market, while assuring that the bank will always intervene in the interbank foreign exchange market to ensure that genuine and legitimate demands are met.

For the records, interbank market is a financial system and trading of currencies among banks and financial institutions which excludes retail investors and other smaller trading parties. According to investopedia, Retail Dutch Auction System is a public offering auctions structure in which the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold. While the Wholesale Dutch Auction System is a type of auction in which the auctioneer begins with asking price which is lowered until participants are willing to accept the auctioneers' price.

It is instructive to note that, while the RDAS/WDAS regime lasted, it provided jobs for players, enhanced economic activities, made the buying and selling of hard currencies easier as well as reasonable profits made from the enterprise. But market players drew the irk of market regulator when they refused to recognize the extra ordinary moment and stress the nation's foreign exchange market is subjected to by the fluctuating price of crude oil at the international market.

It is disproportionate and outrageous that, while the apex bank was working round the clock to stem the tide of falling naira, some unscrupulous elements were sabotaging such efforts.

Again, when the apex bank fixed exchange rate at N 168 per United States Dollars, doggy methods were employed to create artificial scarcity, pushing the exchange rate to N 218, the figure it was as at the time of writing this piece. Apart from this, the stated figure was far above the N198 obtained at the interbank foreign exchange market.

As stated earlier, players indulged in various unethical methods such as speculative demands, round tripping, rent-seeking, spurious demands and inefficient use of scarce foreign exchange resources by economic agents to feather their nest at the expense of our national pride-the Naira.

However, what could be described as similar measure was introduced at the height of the Global Financial Crisis in the country in 2009, when the property market fell below the equilibrium point in Europe and America. The financial crunch led to downward turn in the price of commodities generally. Renowned economist, Joseph Stalitz described it as 'Depression'. As a result, Nigeria experienced capital flight as available hard currencies were moved to developed countries to acquire properties at cheaper rates.

Similar scenario plying out today was experienced at the global energy market where a barrel of oil traded as low as $37. The development affected our economy badly! The effect became too harsh because between June/July 2008, Nigeria bountifully enjoyed from the hike in crude oil price as a barrel went as high as $147. Hence, the leadership of the apex bank then directed that foreign currency should only be sold to those who wanted to import essential commodities at the official exchange rate so as to avoid corresponding increase in the price of imported goods. Those without genuine need for dollars were asked to confront the law of demand and supply at the parallel market.

But this time, the down turn in the oil price is not caused by Global Financial Crises, but uncoordinated supply of the product by the global oil cartel-Organization of Petroleum Exporting Countries (OPEC).

Before taking the decision on RDAS/WDAS, it was earlier reported that the apex bank had directed commercial banks to submit details of domiciliary account holders, including the name, account number and balances left.

Other information required were list of corporate domiciliary account holders and their balances, list of public sector institutions domiciliary account holders and their balances as well as the mode of lodgment to the account; either by cash or by wire transfers. These were all measures introduced to checkmate sharp practices in forex.

However, the closure of RDAS/WDAS might have absorbable effects on the economy which analyst says is a price that must be paid for indulging in unethical practices. Such effects includes sending some persons out of job, creating wide margin between the selling price and buying price of dollars; making dollars a scarce commodity as well as sending small scale importers out of importation business. Perhaps, this cost is reasonably fair and endurable until the free fall of dollars is reversed as the price of oil at the international market is gradually picking up.

But this is not to suggest that efforts aimed at walking the talk on economic diversification should be jettisoned. Hence, if there is any lesson learnt from the current glut of oil price, it is the sad reality that since 1956 when oil was discovered in Nigeria, all mouth weltering and inspiring speeches and lectures on economic diversification lacked coherent blue-prints and clear-cut strategy on how to give Nigeria a foothold on the global economy. Therefore, the time to act is now and not latter because great imagination and creativity comes in moments of difficulties.

Comrade Edwin Uhara is a Journalist and Public Affairs Commentator based in Abuja.

Reach him on 07065862479
[email protected]

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Articles by Edwin Uhara