I have come to the conclusion that our biggest problem is forex supply. Our monthly national demand for forex is about $4.6 billion, while the official monthly inflow is less than $1 billion. Our dollar reserves will continue to dry up if oil prices do not appreciate, and while many an economic analyst reasons that devaluation is desirable to curb demand, the fact is: as long as supply is far lower than the demand, the margin between demand and supply will keep widening and the exchange rate will keep going up. If we devalue the naira, therefore, black market will also devalue, except forex supply improves. Hence, if CBN moves to N300, black market could move to N400.
The flip side of the “supply crisis” scenario is that it is through devaluation that the shortage can be addressed. It is argued that if we devalue, forex demand will automatically fall. Also, we are to expect an inflow of forex through investments, remittances and repatriations. At N197 to a dollar, your uncle in the US will more likely send $10,000 to you by cash so that you can get N3 million in the black market rather than wire it through a bank which will pay you just N1.97 million. A foreign investor knows that his $1 billion is worth N300 billion in the black market but his account will be credited with only N197 billion at the official rate. He would think twice.
Also, an exporter who earned $100,000 on his exports would rather keep the proceeds abroad. If he repatriates the money by official channels, the value would be just N19.7 million, whereas he can get as much as N30 million by selling to Nigerians abroad who need forex. He thus trades with his proceeds abroad, thereby denying Nigeria a source of forex, even though he is a beneficiary of the official rate. The argument, therefore, is that by maintaining this huge gap between official and unofficial rates, we have effectively shut out several sources of autonomous forex inflow. Our reserves won’t grow and parallel rates will keep soaring.
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