EXCHANGE RATE DETERMINATION IN NIGERIA, THE EXPERIENCE UNDER THE WHOLESALE DUTCH AUCTION SYSTEM (WDAS); 2002– 2010

Abstract

The instability in the naira exchange rate has been a very disturbing issue for the Nigerian government. In recognition of this, various exchange reforms have been adopted to establish an acceptable value of naira over the years. The Dutch Auction System (DAS) is one the recent exchange reforms employed in Nigeria. The employment of the DAS began with the Retail Dutch Auction System (RDAS) that was employed in 1987, 1990 and 2002. The failure of DAS to establish a realistic exchange rate for the naira led to the introduction of the Wholesale Dutch Auction system (WDAS) on the 20th of February, 2006. This paper has investigated whether the switch from RDAS to WDAS has been able to establish a stable value for the naira exchange rate. It equally investigated whether there has been convergence in the various segments of the market (Interbank Foreign Exchange Market (IFEM), Bureau De change (BDC), and WDAS. The paper employs daily time series data from 20th February 2006 to 20th February, 2010. The series used to investigate stability and convergence are: Marginal rate (MR), Quantity traded (QT), Successful bid (SB), Un-Successful bid (UB), Demand (DD), Supply (SS), Highest bid rate (HB), Lowest bid rate (LB). This paper found that convergence was realised in various segments of the markets. However, volatility was still persistent in the marginal rate series and the demand series, and this constituted the continuous instability in the value of the naira. Therefore, the paper recommends that, the CBN should use monetary policy more proactively to stimulate the domestic production base of the economy so that Nigeria can import less and export more thereby reducing the excess forex demand pressure. Secondly, the CBN should create a more market determined template for foreign exchange determination by devolving more of its monopoly power of foreign exchange supply. Thirdly, CBN foreign exchange policy shift should be followed up by timely analysis of its efficacy in yielding result.