Reintroduction of RDAS solution to misalignment of naira value – Rewane
The reintrodiced Retail Dutch Auction System (RDAS) is expected to be a solution for efficient price discovery to reduce the misalignment of the naira from its fair value, which will in turn ease the cost-of-living crisis.
“This would help stabilize the naira, easing the cost-of-living crisis driven by the naira’s rapid depreciation and surging inflation”, said Bismarck Rewane, Managing Director of Financial Derivatives Company (FDC) Limited.
He said the cost-of-living crisis catalyzed the ongoing 10 days of protest in Nigeria, which began on August 1. While the intensity of the protest has subsided, over 30 lives have been lost, with an estimated N800 billion worth of properties destroyed, in addition to an output loss exceeding N1.3 trillion.
He said in a publication, FDC Prism, he said, misalignment of the naira has been a persistent concern for an extended period, and policymakers face the challenge of establishing its fair value compared to the market value. One way of doing this is through an efficient price discovery mechanism, with options ranging from a retail Dutch auction, wholesale auction, and interbank system to allocation and rationing. The key aim is to ensure that those who need foreign exchange can obtain it at an effective price, which the retail Dutch auction system (RDAS) would enable due to its transparent approach.
The misalignment of the naira value has plunged some natipns into economic crisis, yet with some managing to add value to per capita income.
Rewane said, opinions on the over-reliance of national debt as a source of financing development projects are sharply divided among economists. ‘While Keynesians argue in favour of borrowing to finance capital and developmental projects, the Austrian school hold an opposing view due to concerns about resource misallocation and long-term sustainability”.
“Today, the effects of rising debt levels vary widely. In Nigeria and Zambia, general government debt increased by 586 per cent and 1056 per cent respectively from 2014 to 2023, while per capita income fell by 48 per cent ($1,688) and 20 per cent ($3,223).
“Conversely, India saw a 193 per cent rise in debt, and its per capita income increased by 60.3 per cent to $2,500.
“Countries facing debt overhangs are now encouraged to pursue sovereign deleveraging, such as through sustainability debt swaps”, according to Rewane.
The Central Bank of Nigeria (CBN) has said it undertook the sale of foreign exchange (forex) to end users through a RDAS.
According to a statement by Omolara Duke, Director, Financial Markets Department of the apex bank, the step was taken on Tuesday to reduce the demand pressure in the Fx market and promote price discovery.
Duke said that authorised dealer banks were required to submit a comprehensive template that contained the details of all the outstanding forex demand of their customers via email.
