Rules, reasons and Nigeria’s forex market stability
Just 10 days ago, the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, opened a gathering made up of journalists, saying: “The management of the bank has called this press conference to give you updates on recent developments in our foreign exchange (forex) market, as well as the decisions we have taken to ensure that we continue to strive to attain our mandates as set out in the CBN Act of 2007…”
It must have been a tensed moment, especially over what pronouncement would then follow. First, a tensed moment for stakeholders in the beleaguered sub-sector, if only they were aware of the event ahead of time. Second, for everyone who believes in the “Nigeria Project” and who may have been affected by the developments in the sector overtime, especially with regards to the touted devaluation proposal. Indeed, it was a decisive moment.
Of course, Nigeria has been dealing with tripartite development issues, which also have global undertones- the over 70 per cent drop in the price of crude oil, which contributes the largest share of the country’s Foreign Exchange Reserves; geopolitical tensions along critical trading routes in the world including between Russia and Western Powers, Saudi Arabia and Iran; and normalisation of monetary policy by the United States’ Federal Reserve Bank.
Amid these challenges, the country is particularly involved not only with respect to the quantity of revenue earnings, but the forex component of the earnings and its consequences on the naira exchange rate. Therefore, the forex market sub-sector led the priority list of the country’s challenges.
Falling from a peak of $114 per barrel of crude oil in July 2014, to as low as $29 presently, the country’s reserves has suffered great pressure from speculative attacks, round tripping and front loading activities by forex market actors.
On the part of CBN, the fall in oil prices also implied fall in CBN’s monthly forex earnings, from as high as $3.2 billion to as low as $1 billion currently, with increasing demand for forex by importers averaging N917.6 billion per month in first nine months of 2015. This tells the story of the unfortunate depletion of Nigeria’s forex reserves, from $37.3 billion in June 2014, to $28.6 billion currently.
Again, the case at this point is not whether “something” and/or “somebody” is responsible, but how to curtail the assessed “excesses” of either and/or both.
Starting with the reordering of priorities in meeting the demand for forex given the plummeted stock of reserves, CBN listed matured Letters of Credit from commercial banks; importations of petroleum products and critical raw materials, plants and equipment; and payments for school fees, Basic Travel Allowance, Personal Travel Allowance and other related expenses.
But baring fangs over the observed continuous flagrance to rules of engagement, Emefiele said: “We have continued to observe that stakeholders in some of the sub-sectors have not been helpful in this direction,” and in particular, were the activities of the Bureau de Change (BDC) operators.
The guideline establishing them said they were to serve retail end users who need $5,000 or less, but unending allegations have it that they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction beside using fake documentations- passport numbers, BVNs, boarding passes, and flight tickets to render weekly returns to the CBN.
This is despite the fact that Nigeria remained the only country in the world where the central bank sells dollars directly to BDCs. Still, they were adjudged to have continued the sale of dollars at rates as high as N250, against the official rate of N197 per dollar, with a regulated margin to them.
The Acting President of the Association of Bureau De Change Operators of Nigeria, Alhaji Aminu Gwadabe, while he could deny that unscrupulous elements may be among them, said: “On the issue of malpractices and rent seeking behaviours, the association’s position is very simple: impose heavy sanction on any operator found culpable of committing any illegality. There will always be bad eggs in every group or industry, and the foreign exchange market is not an exception.
“Given the huge demand for foreign exchange, the inability of the CBN to meet genuine demands, and the concomitant widening of the gap between the official and parallel market exchange rate, there will be individuals who will not be able to resist the temptation to engage in rent seeking and round tripping. These individuals are not limited to BDCs but also include banks and other participants in the foreign exchange market.
“The only way to deter such illegalities is to impose heavy sanctions, including cancellation of their operating license. But the CBN would rather criminalise the whole BDC sub-sector instead of doing the work of enforcing its regulations through appropriate sanctions. We take exception to these.
“We urge Governor Emefiele to do what Chief Joseph Sanusi as CBN Governor did in 2001 when he suspended the foreign exchange dealership of 21 banks for foreign exchange malpractices. We also urge him to do what his immediate predecessor, now the Emir of Kano did in 2013 when he cancelled the operating license of 20 BDCs including FBN BDC for round tripping of foreign exchange.
Another pointer to the rent-seeking behaviour, is that since the CBN began to sell foreign exchange to BDCs, the number of operators have risen from a mere 74 in 2005 to 2,786, while 150 applications for licence are being submitted monthly.
It is worth noting that the financial burden on the economy and the regulator in managing the dwindling forex earnings profile started with CBN selling $60,000 to each BDC per week.
This amount translated to $167 million per week, and about $8.6 billion per year, but to curtail its effect on the reserves in the face of falling oil prices, the weekly intervention was reduced to $10,000 per BDC, which translated to $28.4 million per week and $1.476 billion yearly.
This is still huge, not because the bank has not given more than this before, but more important, the state of forex earnings profile of the country. Besides, the concern is that BDCs have become a conduit for illicit trade and financial flows.
The verdict: Just like the opening statement of the Governor at the press briefing, he said: “The management of the Central Bank of Nigeria has reached the following decisions, which take immediate effect:
• The bank would henceforth discontinue its sales of foreign exchange to BDCs. Operators in this segment of the market would now need to source their foreign exchange from autonomous source. They must however note that the CBN would deploy more resources to monitoring these sources to ensure that no operator is in violation of our anti-money laundering laws; and
• the bank would now permit commercial banks in the country to begin accepting cash deposits of foreign exchange from their customers.
“These measures are not intended to be punitive on anyone or any group. Rather, it is meant to ensure that the CBN is better able to carry out its mandate in an effective and efficient manner, which guarantees preservation of our scarce commonwealth, and that our hard-earned financial system stability remain intact to the benefit of all Nigerians.”
The Head of Research and Investment Advisory, Sterling Capital, Sewa Wusu, said the CBN’s policy shifts are good for the sector to the extent that they can source foreign currencies independent of the CBN, which will in turn reduce pressure on the reserves.
“At the level of the reserves now, it is a critical one. The focus on oil price projected at $20 per barrel sooner is also not favourable, not only for the reserves but for government revenue.
“The policy makes a great difference for good because if CBN continues to deplete the reserves on weekly basis, it will not result in any good for the economy,” he said.
But Dr. Austin Nweze of the Pan Atlantic University said the new policy will enthrone a regime of competition sort of, among the parallel market operators, because the cheap dollar from CBN would have gone.
Though he acknowledged that CBN only did an aspect of the policy expectations, he was optimistic that whatever price the naira exchanges at the moment would only be in the short term, because the hidden dollars would come out to reduce supply shortages.
However, he urged to authorities to be serious about leakages that would distort expected results and support local industries to achieve import substitution strategy to reduce import-induced pressure.
An Abuja-based development consultant and civil society activist, Jide Ojo, also commended CBN’s decision to stop the sale of forex to BDCs and the lifting of ban on bank customers who hitherto had been barred from depositing foreign currencies in their domiciliary accounts.
“CBN ought to have stopped the sales of forex to BDC long ago given the fact that it was not an international best practice, as Nigeria remained the only country where such is done worldwide.
“What is needful at this point in time is for CBN to strengthen its monitoring and evaluation unit and ensure that both the BDCs and bank customers operating domiciliary accounts are not allowed to abuse its policies any longer,” he said.
A former President of the Chartered Institute of Bankers of Nigeria, Mazi Okechukwu Unegbu, said the decision should have been taken long before now, rather than reduction in the weekly intervention, but commended the apex bank for taking the bold step at last.