AN EVALUATION OF RETAIL AND WHOLESALE DUTCH AUCTION SYSTEMS OF FOREIGN EXCHANGE RATE IN NIGERIA (2002-2010).

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AN EVALUATION OF RETAIL AND WHOLESALE DUTCH AUCTION SYSTEMS OF FOREIGN EXCHANGE RATE IN NIGERIA (2002-2010).

Abstract:

The study evaluated Retail Dutch Auction System (RDAS) and Wholesale Dutch Auction System (WDAS) of foreign exchange rate in Nigeria with a view to make comparative analysis between the two phases in terms of volatility of demand, supply and marginal rate, presence or absence of collusive behavior and exchange rate spreads. The study used bi-weekly Dutch Auction results of 824 sessions (comprising of 342 retail sessions and 482 wholesale sessions) between 2002- 2010. The GARCH model and descriptive statistics were used to investigate the volatility of demand, supply and marginal rate. Also, descriptive statistics were used to analyze presence of collusive behaviour and exchange rate spreads. The study concluded that although marginal rate, demand and supply remained volatile under both retail and wholesale phase of the auction, they were more volatile under wholesale phase than retail phase of the auction. Also, higher excess demand and higher chance for collusive behaviour among bidders of foreign exchange were more prevalent in the wholesale phase than retail phase of the auction. The trend analysis showed that the introduction of Wholesale Dutch Auction System had led to a sustained convergence of the BDC, IFEM and WDAS rates even though it could not curtail the depreciation of the Naira. The following recommendations were made; firstly, the government should reduce excess demand by embarking on an import substitution strategy that will stimulate the domestic production base of the economy thereby reducing foreign exchange excess demand gap. Secondly, CBN foreign exchange policy shift should be followed-up by timely systematic analysis of its efficacy in yielding results so as to avoid frequent policy reversals. Thirdly, in the long term, the Dutch Auction System should be suspended because despite the modifications it had witnessed overtime, it had failed to stabilize the Naira during both retail and wholesale auction. Fourthly, the CBN should create a more market determined template for foreign exchange determination by devolving more of its monopoly power of foreign exchange supply so that excess demand gap can be narrowed. Finally, further studies should focus on investigating the effectiveness of the recently introduced foreign exchange rate forwards with the aim of evaluating its impact on the stability of the exchange rate.

AN EVALUATION OF RETAIL AND WHOLESALE DUTCH AUCTION SYSTEMS OF FOREIGN EXCHANGE RATE IN NIGERIA (2002-2010).

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