Over the last couple of weeks, as the price for Bonny Light (Nigeria’s benchmark crude) touched new depths on the global markets, and our export earnings dropped, conversation has fixated on appropriate fiscal and monetary policy responses. In slow motion, the fiscal side declared an “austerity programme”, details of which presumably are still being worked out.

On its part, the Central Bank of Nigeria (CBN) was more prompt. By far the bigger threat from our much-changed external funding condition was to its external reserves. Domestic economic units, persuaded that the naira was going to be the biggest casualty from the country’s loss of earnings were always going to translate their assets into a more stable currency — in our case, the US dollar. About two weeks ago, therefore, exchange rate management moved to the fore and centre of public discourse, as the CBN shunted the larger share of foreign exchange transactions from the official market (the Retail Dutch Auction Window — RDAS) unto a more market-driven track — the interbank market.

As a portent of the naira’s outlook, this was ominous, true. Even more true is the fact that the CBN’s play in the market up to this new point was (and still might be) inefficient. Users of the dollar obtained the currency at softer rates from the official market. And if they were legitimate, for instance exporters who then earned dollars from their activities, now went on to sell their dollar proceeds on the unofficial market. The spread between the interbank market for foreign exchange (between banks) and the CBN window is much narrower than that between the latter and the parallel market. But whichever window our exporters used to convert their dollar earnings into naira would see them pocket subsidies from having accessed their initial dollar needs from the official window.

Given that the RDAS was at heart a subsidy programme for big corporates, the new question is “What is the CBN’s strategy for dealing with a situation like this?” Most commentators on the economy hope that the meeting today (and tomorrow) of the CBN’s Monetary Policy Committee (MPC) would offer insights into this question.

How much does it matter that three weeks ago, further responding to the downward pressure building up on the naira’s exchange rate, the central bank re-opened its foreign currency forward window? In its most basic operations, a foreign exchange forward contract binds both parties in a transaction to buy or sell a stated amount of a given foreign currency, at a given price, at a determined time in the future. It would seem, however, that in its current state, the CBN’s window is a one-way street — the apex bank sells dollars, and foreign exchange users (concerned to manage the risks inherent in the domestic currency moving against them) buy. The latter do not thereafter sell their foreign exchange earnings to the CBN via this window.

Despite the complications posed by the CBN’s limited forward window operations, at the best of times, pricing for foreign currency forwards is a difficult enterprise. There are too many moving parts — demand and supply dynamics, relative inflation rates in the respective economies, etc. It is thus useful when relative exchange rate stability prevails. In our current situation, all it does for a seller like the CBN, which may have turned to the forward window in its bid to hold off pressure on scarce and rapidly depleting reserves, is put off the date when it has to cough up reserves to meet its promise to sell. Without access to new sources of dollars, this tactic buys the seller 90 days at best.

Does the CBN know where it is going on this? No one is sure. But it did not open this window, Wednesday, last week, and no explanation was offered its bank counterparties.

As it were, the CBN has two options. It may continue to back exchange rate stability, running the risk of a rapid run through of its external reserve balances. The consequences of this for the economy are obvious, and irrespective of whatever vantage it is contemplated from, all dire. Alternatively, the CBN may take the road to the market: shift all foreign exchange transactions on to the interbank market. In other words, close RDAS operations, and conduct all its interventions in defence of the naira at the interbank market. This way, it lessens the costs to the economy (including from having to raise interest rates in support of the naira) of our reduced export earnings.