Economy Today

Multiple Exchange Rate Systems in Nigeria and its Implication on the Economy

Economy Today

By Biyi Adeniran

A multiple exchange rate regime is any exchange rate regime that applies two or more exchange rates to the same currency
In a dual exchange rate system, there are both fixed and floating exchange rates in the market. The fixed rate is only applied to certain segments of the market, such as “essential” imports and exports and/or current account transactions.

The rationale for having a multiple rate system is to insulate domestic prices and activity from exchange rate fluctuations deriving from transitory shocks in the financial market.

Dr. Ngozi Okonjo-Iweala, in her recent official visit to Nigeria as the Director General of the World Trade Organisation (WTO), alerted Nigeria on the global body’s concern about Nigeria’s multiple exchange rate regime and its impact on international trade.

She only reinforced the IMF’s calls on members not to have multiple exchange rates in line with Article VIII of its Articles of Agreement.

The obligations under Article VIII of the Fund’s Articles of Agreement was relaxed for developing countries in the 1980s as a result of the debt crisis of the 1980s.

Meanwhile there are transitional arrangements under Article XIV that permit countries to maintain multiple exchange rates for a transitional period.

It is therefore assumed that the exchange controls would be removed and the exchange market unified once the payments crisis is over.
Countries adopt multiple exchange rates when there are severe balance of payments outflows in response to perceptions of macroeconomic breakdown; the private sector was deeply indebted, the economy had slid into recession, deteriorations in competitiveness and inflation had accelerated as a result of recent devaluations.

Moreover costs of multiple exchange rates can be explicitly identified and can probably protect export profitability where separate rates exist for current and capital transactions.

In Nigeria there are Investors’ and Exporters Forex Window, CBN official rate, parallel market rate, Retail Secondary Market Intervention Sales and wholesale SMIS.

In Nigeria multiple exchange markets had altered ‘patterns of resource allocation and encourage rent-seeking, smuggling, and other activities for which no incentives would exist in a deregulated market environment’.

There has always been a leakage of transactions from the official to the parallel market as it is very difficult to prevent leakages of transactions from one market into the other while depreciation of the parallel exchange rate has always led to inflationary expectations.

A multiple exchange rate system has led to economic rents for factors of production benefiting from implicit protection. This has opened up doors for increased corruption as people gaining lobby to try and keep the rates in place.

It is suggested that the implementation of tariffs and taxes could be adopted as against the multiple exchange rates and that government should create a good regime for Small and Medium Enterprises to grow.

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