Foreign exchange: CBN in a fix

With the economy clearly hurting, calls for the Central Bank of Nigeria (CBN) to ease forex trading restrictions and devalue the naira are growing louder. But with an eye on the parlous state of the country’s external reserves, the apex bank is so far resisting such calls. DGossip247 reports.

The naira is in a free fall on the parallel market. Since June 24 when the markets started reacting to the Central Bank of Nigeria (CBN)’s latest policy to restrict access to foreign exchange for certain categories of importers, the naira has declined against the dollar almost on a daily basis from N222 to N240 as at last Friday. Pundits are predicting that the local currency would further depreciate unless the CBN reviews its forex policy. Items restricted Essentially, the policy banned importers of 41 selected items such as rice, private jets, textiles, tomato paste, poultry products and furniture from access to foreign exchange in either the interbank or Bureaux De Change (BDC) markets. The CBN argued that it took the step in order to beef up the country’s rapidly depleting external reserves, pointing out that most of the items on the list could be produced locally. It also stressed that the implementation of the policy would help to conserve foreign reserves and facilitate the resuscitation of domestic industries as well as create employment.

Interestingly, although following the 50 per cent slump in oil prices, the CBN had since the last quarter of last year introduced various measures to try to curb demand for forex such as closure of the official foreign exchange window, review of banks’ Net Open Position (NOP) and placement of 72-hour limit on forex utilisation, among others, none has, arguably, had such an immediate impact on the economy as the latest policy. For instance, barely 36 hours after the CBN announced the new policy, the naira fell against the dollar from N222 to N225 on the parallel market. According to analysts, the new policy resulted in an estimated $5.7 billion quarterly forex demand by importers of the 41 items moving from the official to the parallel market, thereby fuelling scarcity of dollar in that market as well as the BDC segments of the forex market. Mixed reactions The development has generated mixed reactions among industry stakeholders. While most banks and affected importers have called for a review of the policy, other financial analysts believe that the regulator made the right call. For instance, Managing Director and Chief Executive Officer of First Bank of Nigeria Limited, Mr. Bisi Onasanya, contended that the CBN needed to let the naira be devalued because the foreign-exchange trading restrictions had started to harm growth in the country’s economy.

“People just don’t believe that the CBN has what it takes to sustain the exchange rate at the present level. The market needs to reopen. You cannot peg the naira at a level that the whole world knows is unrealistic,” he said. “We are in a situation where Nigerian banks are shopping for foreign-exchange in the international market. We need to bite the bullet and move on, or there will be repercussions over the long term,” Onasanya further said. However, respected financial analyst/consultant, Dr. Boniface Chizea, faulted the First Bank’s CEO’s stance. In an article made available to New Telegraph, he argued that past devaluations did not lead to the stability of the exchange rate and urged the CBN to stick to its policy.

He stated: “The point has to be made again that if you liberalise the naira and relax controls to make the foreign exchange market more liquid, the country will run into real problems. The reserves will collapse overnight and credit risks will worsen and the much-taunted growth in productivity will not result to impact the unemployment situation. “In my well-considered opinion, this country should do all it takes to avoid succumbing to the pressure of those who would preach devaluation but only do so as it is adjudged inevitable, even then within the context of a mix of other supportive policies… Devaluation is an ill wind and a slippery slope, which once you are unfortunate to encounter, is difficult to know where it will bottom out; as a matter of fact, it never does!” He further argued: “In point of fact, devaluation in the present Nigeria situation caters more to the interest of the external sector. The challenge confronting the country and, particularly the Central Bank, is that reserves are dwindling with little or no prospects for accretion and the vulnerability of Nigeria in its dependence on oil revenue is well known and therefore portfolio investors first voted with their feet by a reversal of investment flows, suspecting devaluation and those outside are waiting for things to stabilise and the degree of freedom, which the Central Bank enjoys is limited.” LCCI’s perspective It was against this backdrop that the Lagos Chamber of Commerce and Industry (LCCI), last week, organised an interactive forum on CBN’s foreign exchange policy. It was an opportunity for some LCCI members who had complained that their businesses would be badly affected by the policy to lay their complaints with the CBN.

Specifically, they said that the failure of the CBN to define the Harmonised System (HS) Code for the items on the list had prevented them from accessing foreign exchange to import vital inputs and that they were on the verge of closing shop. But stating the CBN’s case, the Bank’s Director, Monetary Policy Department, Mr. Moses Tule, emphasised that the major objective of the CBN in stopping the sale of forex to affected importers was to ensure the survival of the Nigerian economy. Tule pointed out that the regulator had little choice but to take the step, arguing that the rising demand for foreign exchange would have resulted in the depletion of the external reserves and the collapse of the economy. He lamented the import dependent nature of the country’s economy, pointing out that many of the items that are imported into the country can be produced locally. According to him, in the first five months of this year, $575 million was spent on the importation of wheat, while $374 million was spent on fish and $349 million on electrical and electronic appliances into the country. “It would be wrong to continue with a policy that will keep impoverishing our farmers, local industries and growth of our economy, why will somebody be importing toothpick or egg, when we have it in abundance in Nigeria?” Tule said.

The CBN director noted that the regulator was concerned about rising unemployment in the country, stressing that the importation of items such as rice, cement, tooth pick and so on, boosts employment in their countries of origin while worsening the problem back home. He said: “The level of unemployment is worrisome. No economy is born by foreign exchange. The level of economic activity creates foreign exchange and the economic activity must be such that economic agents must create foreign exchange agents and bring it back to the economy. If you keep taking water out of a bucket without putting some back, it would eventually become empty. An economy must first exist before you can have a CBN.” The CBN top official also rejected criticism that the list contained not only finished products but also vital inputs, which many manufacturers needed to keep their factories running. He, however, stated that the CBN would examine the suggestion that it should attach HS Codes to items on the list.

As he put it, “if we begin to define what is input or finished goods, we will not stop anything. What is one person’s input might be another’s finished product. But I will take the issue of the definition of HS Codes back to Abuja.” In his remarks, LCCI Director General, Mr. Muda Yusuf, urged the CBN to quickly take steps to address the concerns raised by manufacturers on the lack of clarity on what items are affected by the restriction. He noted that there was a lot of uncertainty in industry circles about the next step that the regulator would take, noting that this was hurting the economy. CBN jettisons devaluation However, despite of the concerns about the policy expressed by key stakeholders last week, the CBN insisted that it was going to stick to its position. For instance, reacting to the steady decline in the value of the naira on the parallel market, last Thursday, CBN’s Director, Corporate Communications, Mr. Ibrahim Muazu, stated that the apex bank would not be distracted by the development and would not take it into consideration in determining the exchange rate. He contended that the volume of trading in foreign exchange that takes place in the market was so marginal that it should not be used to determine the naira’s rate.

He said: “There is need to demarket; how can less than one per cent be determinant of the rate? Most of those going that way are those that don’t want to be documented.” Muaza insisted that the official interbank market had the capacity to handle legitimate dollar transactions, but that people preferred to use the unofficial parallel market for undocumented transactions. He further pointed out that the CBN was currently not considering devaluing the naira as doing so could worsen inflation. More significantly, CBN Governor, Mr. Godwin Emefiele, also stoutly defended the bank’s position while appearing before the leadership of the Senate last week.

He revealed that as a result of the measures put in place by the apex bank, the external reserves, which had declined from $37.3 billion in June 2014 to $29.1 billion as at the end of June 2015, had begun a gradual recovery, noting that as of July 7, 2015, the reserves stood at $31.89 billion. Conclusion However, the general view among analysts is that if the naira continues to decline in the parallel market, the CBN would have little choice but to devalue the currency, especially if the price of oil does not sufficiently recover. As one analyst put it, “the external reserves would determine if the CBN would devalue or not. If the reserves keep rising, the CBN would feel confident that its measures are having the desired effect and would see no reason to change. But if despite all the restrictions, the naira continues to depreciate and the reserves remain under pressure, the CBN would just have to devalue the naira. Unless oil prices rise to early 2014 levels, the CBN will consistently have a difficult job managing the exchange rate.”