CBN and forex cash deposits
THE waxing dollarization of the Nigerian economy is unacceptable. However, because its occurrence is traceable to the entrenched federal fiscal and monetary policies, the public should not be led to believe that the CBN can eliminate it by egging on deposit money banks (DMBs) to refuse lodgement of foreign currency cash in domiciliary accounts except by taking steps methodically to make the naira the preferred currency in the country. As the CBN duly acknowledges, “the most important function of central banks everywhere in the world is to issue legal tender currency and to defend its value (domestically by ensuring low inflation and externally by ensuring appropriate and stable exchange rate regime).” Disappointingly, the apex bank’s record in that regard is depressing. The value of the naira peaked in 1980 at N0.55/US$1. As at August 2007, the exchange rate stood at N126.68/$1, signifying a drop in value by 99.6 per cent. Over the same period, the consumer price index or inflation rose 190-fold. That August, the CBN announced its Naira Reform Agenda Phase Two, a four-part agenda which included “sharing part of the Federation Account Allocation in U.S. dollars to deepen the forex market and liquidity management to commence from September 2007”.
However, citing the lack of prior notification of the President, then Attorney-General had the plan aborted. Well, perhaps the part of the proposal concerning currency re-denomination required prior notification. Yet, it is certainly superfluous for the CBN to obtain Mr. President’s approval beforehand in order to carry out its statutory mandate in accordance with best practice the world over, and all the more because the principal objects of the apex bank have remained virtually unchanged in all the versions of the CBN Ordinance, Decree or Act duly assented to by the Governor-General, Head of State or President as the case may be since the inception of the CBN. Anyway, as an after-thought, then Finance Minister Shamsuddeen Usman explained that the CBN proposal was only suspended. Eight years on, the cancellation or open-ended suspension of the entire reform agenda has only succeeded in postponing indefinitely the laying of the monetary foundation for the actualization of the constitutionally mandated national economic objectives contained in Section 16 of the 1999 Constitution as amended. Meanwhile, following the voiding of the reform proposal, the value of the naira has plunged further by 36 per cent to N197/$1 as at July 2015 while inflation has climbed (cumulatively) by another 100 per cent.
The plumb decline in the value of the naira and skyward increase in inflation over the years denote CBN’s failure to defend the value of the naira or inability to ensure price and monetary stability. The resulting erosion of confidence in the naira as a store of wealth heightened the craving for currency substitution or dollarization. Indeed, the longevity of the faulty federal fiscal and monetary procedure inheres in the fact that they are tailor-made for treasury looting and dollarization. For instance, the substitution of freshly printed naira funds for withheld Federation Account (FA) dollar allocations led to excess liquidity, inflation, depreciation/devaluation and erosion of confidence in the naira. Also lodgement of substituted naira funds (which ordinarily should be in government treasury) in DMBs made them (funds) open to be looted and used to purchase the very FA forex denied the tiers of government from the interbank forex market and bureaux de change (BDCs). The forex so acquired was kept in private safes, deposited in domiciliary accounts and/or carted abroad for stashing in private foreign bank accounts as well as for importation of goods that undermined domestic industrial production.
Secondly and as if waging war against Nigeria, the Paris and London Clubs of creditor nations on the eve of Nigeria’s external debt exit extracted the policy support instrument from the Obasanjo administration whereby the IMF got the CBN to disburse portions of the withheld FA allocations (the so-called CBN external reserves) in forex cash to BDCs for sale to all-comers on no-question-asked basis beginning from April 2006. Thirdly, in September 2013, the CBN circularised thus, “DMSs shall continue to sell forex cash to BDCs subject to a maximum limit of US$250,000.00 per week per BDC.” There are more than 2,000 BDCs in the country.
From the foregoing, forex amounts in private safes and in domiciliary accounts with DMBs are traceable to withheld FA dollar allocations, CBN-approved DMB-imported foreign currency banknotes, private sector export proceeds and remittances by Nigerians in the Diaspora. The CBN earlier this year reportedly established that $34 billion was being held in domiciliary accounts. Were any illicit forex inflows uncovered? Consequently, the refusal lately to accept forex cash deposits while “existing forex cash deposits can only be withdrawn as cash” portends grave danger to the economy in several ways. One, the use of forex cash for domestic transactions outside banks will intensify. Two, it will become unstoppable to unorthodoxly cart abroad what is essentially Nigeria’s genuine forex earnings to the benefit of currency speculators, BDCs, Western and Asian countries, all of which patronise looted funds from Nigeria. Three, it is an unwritten design for circumventing the clamp-down on imports of some products with interbank forex restrictions. The CBN-induced rejection of forex cash by DMBs is not how to defend the naira as it cannot make the naira to appreciate. So the CBN should rescind its support for the rejection by DMBs of forex cash deposits but simultaneously act methodically to turn future and existence deposits in domiciliary accounts to a means of resuscitating the economy.
Towards achieving national prosperity, the CBN should stop cowering endlessly behind the misstep in economics of an Attorney-General and begin to disburse FA dollar allocations appropriately through trackable means to the tiers of government as well as employ untrammeled managed float system (MFS) to have the entire public sector and autonomous forex supply transacted through DMBs. Unlike the CBN’s unsavoury experience up till now, under the MFS, funds held in domiciliary forex accounts are not withdrawable as forex cash but flow unidirectionally to the open single forex market where DMBs mediate supply and demand for a commission. Also funds held in domiciliary forex accounts form part of the country’s pooled (public sector and autonomous) supply of forex including external reserves, from which a portion may be sold for the purpose of procuring from abroad only duly specified goods and services needed in the country. In effect, the domiciliary account is not meant to facilitate private hoarding of some of the national forex supply but to offer the holder (as a profit maximiser) temporary waiting time to study the market and avoid glut market conditions (which could depress price) before selling.
It is not the mark of well managed economies to import more than they can afford. Imports are not charitable offerings. The restriction imposed recently on certain categories of goods was long overdue. Apart from giving rise to a realistic naira exchange rate and conducive production environment, proper management of the annual volume of forex flowing into the country, notwithstanding the low crude prices and even after removing any amount brought by predatory foreign portfolio investors, should not only meet the import needs but also provide healthy accretion to the FG-owned external reserves, part of which may be appropriated for critical federal projects.
Individuals entrusted with the privilege of being the country’s fiscal and monetary helmsmen, who cannot deliver the above beneficial outcome, should ship out.