On battle to save the Naira

THE way and manner the exchange rate of Naira to the U.S. Dollar ( USD) volatility went hay wire since November 2014 when the Central Bank of Nigeria (CBN) devalued the Naira exchange rate by 8% and another indirect devaluation of fixing the official exchange rate at N198 to USD clearly shows that the CBN urgently needs a change of strategy in exchange rate management.
This is because the CBN, with very wide powers to manage foreign exchange inflow and outflow from Nigeria as well as make policies that regulate the foreign exchange market, is acting like a toothless bull dog.

For instance , paragraph 4 Memorandum 11 of Foreign Exchange Manual in respect of repatriation of export proceeds, to this writer, is very weak. It states “Proceeds of oil and non-oil export proceeds are to be repatriated into the domiciliary accounts of their respective exporters’ account within 90 days for oil exports and 180 days for non-oil exports, failing which the collecting banks will be liable to a fine of 10% of the FOB value of the transaction , including other appropriate penalties as provided by Banks and Other Financial Institutions Act 1991 as amended.” This other penalty is to bar the company from participating in the foreign exchange market.

The loop hole in this regulation is the reason why the CBN is losing track of oil and non-oil export proceeds. Most of the exports, especially, non-oil exports are through FOB contracts, not Letter of Credit. The only evidence of shipment is the Inspection Agent’s report of quality and quantity and the bill of laden issued to the importer abroad. Because the local bank is not a party to FOB contract, the exporter is 100% in control of the transaction; and will be at liberty to advise the importer abroad the account abroad where money will be paid, not necessarily their domiciliary account in Nigeria. Giving them 180 days to repatriate the account gives room for fraud of not repatriating the money.

Worse still, most of exporters of non-oil products, especially agricultural products are Asians especially Indians. How do you expect an Indian to repatriate his export proceeds to Nigeria? Even the Nigerian exporters default in repatriating the money, sell it at black market rate from their accounts abroad and gladly pay the 10% default penalty to their bankers.
Another area of laxity on the part of CBN is the inability to sanction payment for domestic services like school fees, house rent, hotel bills, sale of property etc. in USD. From where are the USD sourced when those paying for these services in USD do not earn USD income? These are some of the leakages that put pressure on the Naira through unnecessary demand for USD.
Nevertheless, the battle to save Naira demands a holistic approach starting from CBN monetary policy. In this connection, it will be necessary for the CBN Governor and the Federal Minister of Finance to work on dumping Breton Woods Economic model which is unsuitable to Nigerian financial system. The infrastructure for economic model where market forces drive micro-economic policies and determine efficient allocation of resources , like foreign exchange, does not exist in Nigeria.

Nigeria is not a credit driven economy. For efficient allocation of resources under a market oriented economy to succeed, all parties must settle their debts as and when due. In other words, there must be no break, or break within tolerant limits, in the circular flow of income.
In Nigeria, parties do not settle their debts as and when due. People do not pay electricity bills, water bills, taxes, and rates as and when due so revenue accruing to government is either delayed or lost. Even governments at all levels do not honour their obligation as and when due to workers and contractors.

Also, Nigerian economy is a cash based economy. There is more money circulating outside the banking system than in the banking system. This is because the informal sector is about 70% of the domestic economic units. The balance of 30% is the formal sector and these are the people that keep their money in the banks. Do you now see why CBN monetary policy does not really drive the economy? Added to this is heavy spending by government to finance deficit budget through funds raked in from Naira devaluation and ways and means advances.
What the writer is saying is that only re-invention of the wheel will save the Naira and move the economy forward. The CBN must abandon its present strategy on monetary management and explore the possibility of fashioning an economic model for managing an economy that is largely informal in which businesses and economic units shun banks and do not trust bank instruments and electronic payment platforms.

With respect to managing N/$ exchange rate, the CBN should try the foreign trade approach since Nigeria is an import dependent country. Since there is high demand for USD which makes Naira to chase USD international trade, CBN should make USD to pursue Naira. The way to achieve this is to invoice our exports in Naira. It will not stop Nigeria from earning USD rather the demand for Naira for foreign trade will achieve two things. First, it will kill the speculative foreign exchange market for scarce USD that leads to massive devaluation of Naira at the foreign exchange market; second , it will eliminate the vexed issue of excess liquidity that occurs during the monetization of USD in the USD to Naira intermediation. In this way, the phenomenon of excess liquidity will be a thing of the past because what caused excess liquidity is the monetization of petro-Dollar receipts under the present substitution method.

When exports are invoiced in Naira, it will stimulate economic activity in Nigeria due to increased demand for Naira which will become scarce and command an enhanced value in the international foreign exchange market. After all, demand for Naira is equal to demand for goods and services Naira will buy. In addition, tourism , hospitality industries will receive a boost. Just as Nigerian importers travel to Asia, Europe and America, to supervise their imports. They will stay in hotels and buy other made in Nigeria goods and services and in that wise, there will be cultural exchanges to the benefit of all parties.

• Chris Enyinnaya, Fellow Chartered Institute Of Bankers, wrote from Ikeja, Lagos.

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