With the Central Bank of Nigeria (CBN’s) foreign exchange (forex) restriction policy on 41 items upheld, large chunk of forex demands have moved to the parallel market. Although ignored by the CBN, quarterly transactions in the parallel market are expected to increase from $20 billion to $60 billion as manufacturers’ continue to rely on it to meet their forex needs. DGossip247 writes that monetary policy directives alone will have limited impact on the fate of the naira and reserves until there are corresponding fiscal controls from the Federal Government
The Central Bank of Nigeria (CBN) is at war. It is a fight the CBN boss, Godwin Emefiele, more than a year ago, inherited from his predecessor, Sanusi Lamido Sanusi.
But the battle for exchange rate stability and preservation of the foreign exchange (forex) reserves even preceded Sanusi. It is just that with the drop in oil income, which constitutes two-thirds of government’s earnings, it has become fiercer.
Emefiele is moving against forex speculators, promising them hell as he watches the naira and foreign exchange reserves in tatters. The naira, which has lost over 20 per cent of its value this year, had last Friday, exchanged for N240 to the dollar at the parallel market, while the reserves, standing at $31.9 billion, can only provide six-month import cover.
“Nigeria’s foreign reserves remain our common wealth and we must all strive to work together to protect it and prevent speculators and rent seekers from plundering it,” Emefiele said.
Hence, it was expected when last month, the CBN banned importers of 41 items including toothpicks, private jets and rice from using official forex markets to fund their imports. For Emefiele, such controls would help stabilise the naira, replenish reserves and boost manufacturing, amid criticisms that the measures are harming the economy. But the CBN boss insisted that importers desirous of importing the affected items re free to do so using their funds without any recourse to the official forex market.
“The only thing that will reduce pressure on our currency is by producing those things we are importing today. We must diversify the structure of our economy from being import dependent to being an economy that produces what she consumes. We will try as much as possible not to hurt your business, but we need to be able to work together,” he told the Bureaux De Change (BDC) operators and bank chief executive officers at a meeting in Lagos.
Stakeholders have continued to state their positions on the policy which is already defining the scope of the economy and real sector operations in the country.
Head, Currencies Market, Ecobank Nigeria, Olakunle Ezun told The Nation that the financial market is overregulated. He said before the policy shift, forex demand in the parallel market stood at $20 billion quarterly, but after the announcement, it was expected to climb to $60 billion quarterly.
“I think there are some shortcomings on those policies. It has become an everyday thing for the CBN to issue circulars on forex market and we are not seeing the effect. I expect that they conduct a thorough study of the market before making pronouncements and that is why there is panic,” he said.
Ezun said the CBN should have done a research showing what the country is producing and what it is importing on those affected items.
“I do not see the CBN devaluing the naira further. The body language of President Muhammadu Buhari does not support devaluation. He wants to see the economy grow,” he said.
President, Association of Bureau De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said the CBN was claiming stability in the official forex window, but outside the official window, the naira has been battered.
“The CBN is ignoring what happens at the parallel market. That is not helping them because huge forex volumes are transacted in this market,” he said.
He said that West African countries, such as Ghana, Cameroun, Guinea, Benin Republic, also fund their import consumption from Nigeria, and this was also putting pressure on the reserves.
“Only a common currency will solve this fix. Nigeria is losing to these countries,” he said.
He said fiscal policy makers should come out with statements supporting CBN’s steps at making Nigeria independent of importation.
“Unless there is adequate infrastructure, the efforts being put by the CBN will amount to nothing because investors will not come.
“The CBN should pursue for an Act of the National Assembly for the convertibility of the naira in the West African countries to discourage those countries from accessing forex from Nigeria. The enforcement agencies should strengthen their intelligence on economic and financial crimes while the CBN and government should institute Special Forex Bank to complement funding gap in the market,” he said.
Former Executive Director, Keystone Bank, Richard Obire, said the latest policy was expected to encourage importers to look inwards and begin local production as the prices of the affected items would shoot up in the market because of high cost of buying forex from the black market.
He said in the long run, the benefits of the CBN’s decision, would outweigh whatever temporary pains it may have at the moment.
“Those who decided to produce those goods locally and export them will earn foreign exchange instead of depleting the reserves. In the short-to-medium terms, it will be painful but subsequently, it will improve the overall economy,” he said.
He said even the International Monetary Fund (IMF) believes that the CBN should protect the reserves because of the huge benefits of such decisions on the naira.
“If the CBN keeps funding these items, the demand for the dollar will rise and this will affect its push for infrastructural development needed to boost the real sector,” he said.
He said the policy could be used to achieve developmental objective, adding that using the available capacity to produce locally, would reduce overall forex demand and when the local production was enhanced, more people will find jobs within the economy.
Chartered Institute of Bankers of Nigeria (CIBN) ex-President Mazi Okechukwu Unegbu said the policy was meant to fix the battered foreign reserves. He, however, insisted that the some items in the list have no business being there because they were raw materials.
Unegbu said: “I have nothing against the policy, but the CBN must be cautious not to drive manufacturers to the parallel market. I expect the regulator to be one step ahead of the stakeholders.
“The CBN should always consider the unintended consequences of its actions and must set a band which the naira must not exceed.”
Unegbu said it was not right to formulate policies simply to attract foreign investors, because if the investment climate was conducive, they would come without being persuaded.
The Executive Director, Treasury and International Banking, UBA Plc, Femi Olaloku, called on government to diversify the productive bases and forex earnings of the economy.
This, he said, would enable the economy overcome the challenges brought about by dwindling revenues from crude oil sales.
“Dwindling oil prices around the globe poses serious challenges to a developing economy like Nigeria, hence the need for government to also consider various diversification options,” he said.
Chief Economist, Africa Global Research at Standard Chartered Bank, Razia Khan, hinted that the CBN may reopen the Retail Dutch Auction System (RDAS) it shut last February as the battle to save the naira and foreign reserves intensifies.
She said that the apex bank is already under intense pressure to re-open two-way interbank forex trading. The economist explained that given the current perceived market shortage of dollar, a re-opening of the market is likely to see dollar-naira trade higher.
“Failure to re-open the forex market may deter direct investment as well. Few foreign investors are ready to commit new investment to Nigeria ahead of forex adjustment that they believe to be imminent,” she said.
CBN Director, Monetary Policy, Moses Tule, said allowing unfettered access to forex will sink the economy because oil price decline has reduced volume of government dollar earnings.
Tule, who spoke at the Private Sector Dialogue with the CBN on forex policy organised by Lagos Chamber of Commerce and Industry (LCCI) in Lagos, accused some manufacturers and real sector operators of insincerity in their forex request.
He said some manufacturers obtain forex from the CBN at official rate send the fund abroad without the intension of importing goods. He said such funds were never repatriated.
Also, he faulted practices where some manufacturers make upfront forex demand, sometimes with over two years’ gap.
“Some importers demand for forex for items they want to buy in the next two years,” he said.
Tule said the business of micro-economic management in Nigeria needs the support of all stakeholders for it to achieve the desired success. He said that no economy is run by forex, and that it is the level of economic activities in the country that determines the volume of dollar-earnings in such country. He said that before the fall in oil prices, the apex bank did its best to ensure that everyone that needed forex got it.
However, with the oil price down, and government dollar-earnings declining, it can no longer be business as usual. He said it is not only businesses that need forex, and that government also needs forex to buy key equipment needed for infrastructural development.
Tule said CBN was not bound to disclose the reason behind its policy before unveiling them, insisting that the policy is in the best interest of the private sector and the nation in general.
“No Central Bank brings its micro economic policy for debate before implementation. We acted in the best interest of the nation with no vested interest anywhere as being alleged in some quarters.
“From January to May, we spent $575 million importing wheat. We have land and farmers in abundance. We should not forget that agriculture contributes about 85 per cent of our Gross Domestic Product. In the same period, we imported fish worth $374 million. Are we saying we cannot produce fish locally? What are we doing with all the fish farms in the country?
“In addition, the nation spent $349 million in the same period importing electrical and electronics; this can only happen here. In other countries they will insist that you set up manufacturing plants in their country, but here we are quick to import. Must we continue to grow other nation’s economies, keeping their factories running to the detriment of ours?”
He insisted that CBN does not have enough forex to encourage people to spend on frivolities, such as tooth picks or even private jets.
However, the LCCI has kicked against the policy, arguing that it has dire consequences for the economy if not reviewed and possibly reversed.
Its President, Remi Bello frowned at the inclusion of what he called ‘intermediate products’ or raw materials on the list. While flaying CBN for not engaging the private sector before introducing the policy, Bello noted that as key stakeholders, the opinion of private sector operators should have been sought.
Managing Director Coleman Industries, makers of Coleman cables and wires, George Onafowokan, said he lost over N800 million due to the policy and the technical devaluation of the naira.
“I lost N800 million as a result of the policy. If we cannot buy our raw materials that we believe have been wrongly tagged in the CBN list, the question is how CBN will cushion the effect of this devastating policy?”
However, for exporters, the policy means increased cash flow and higher profit margins. The Managing Director, Dairy International Limited, Peter Anjorin, who exports timber to China and Vietnam, captured the excitement that came with the decision.
“This policy will create more millionaire-exporters than ever before. I was so impressed with the news that I called my associates together to wine and dine with me,” he said.
But he urged the government to build infrastructure and create conducive environment that will help the real sector thrive and boost local production.
“How can Nigerians be importing cement, margarine, palm kernel, vegetable oil, poultry products (chicken, eggs and turkey), Indian incense, tinned fish in sauce (Geisha, Sardines), cold rolled steel sheets, galvanised steel, roofing sheets, wheelbarrows, head pans, metal boxes and containers, and enamelware which can be produced locally. It is a good thing that the CBN is correcting this anomaly,” he said.
But an economic analyst, Biodun James, said while the move may douse some of the demand pressure in the short run, there is a lot of expectation that the CBN will further devalue the local currency. “Market is still expecting a lot from the CBN in terms of forex policy. The apprehension that the CBN will devalue again has not subsided because the reserve is still under pressure,” he said.
Sub-Saharan Africa economist at Renaissance Capital, an investment and research firm, Yvonne Mhango, said: “We see this policy move as confirmation that forex supply remains extremely tight. But more worrying is the fact that it suggests that the CBN remains reluctant to devalue the naira”. She said there was need for Nigeria to seriously rethink its forex policy to spur investment and quicken economic recovery.
The CBN has overtime been churning out diverse forex policies. It has stopped BDCs from funding import transactions in any form whatsoever, either by cash or wire transfer. It also limited BDC’s dollar sales to individual to a maximum of $5000.00 which must be for the Business Travel/Personal Travel Allowance.
The regulator also promises to investigate travelers breaching the rule on $10,000 maximum cash or negotiable instruments across the borders. It said the transportation of cash or negotiable instruments in excess of $10,000 or its equivalent by individuals in or out of the country shall not be allowed unless such funds are declared at the borders.
The regulator expressed concerns on the increasing trafficking of huge sums of foreign currency across the borders in defiance of the extant dictates of Section 2 (Sub-Section 3 to 5) of the Money Laundering (Prohibition) Act 2011 (as amended).
Intervention in the forex markets is not limited to Nigeria alone. The United States (U.S.) monetary authorities occasionally intervene in the forex market to counter disorderly market conditions. The Treasury, in consultation with the Federal Reserve System, has responsibility for setting U.S. exchange rate policy, while the Federal Reserve Bank New York is responsible for executing forex intervention. The U.S. forex intervention has become less frequent in recent years.
Like Nigeria, China’s exchange rate is being controlled by the People’s Bank of China (PBoC) which manages the value of the Renminbi by fixing the rate on each trading day.
A prime reason for China to keep the value of its currency low versus its trade partners is that it makes its exports cheaper, and more attractive. China believes such an exchange rate policy is required to sustain a high growth rate. As a result of the managed exchange rate that keeps the Renminbi relatively cheap, China’s growth depends to a large degree on exports.
For Kenya, the shilling had come under renewed pressure due to heightened importer demand mostly in the energy and manufacturing sectors as well as declining forex inflows from key earners such as tourism, coffee and tea. Just like Kenya, Nigeria does not export much, and relies on monetary policy to manipulate exchange rate instead of boosting its productivity to attract forex. But this may change if the new import restriction by the CBN is well-implemented.
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