Worried by the dwindling fortunes of the naira which repeatedly plummeted against the greenback for months, the Central Bank of Nigeria had in February introduced an unprecedented intervention model which has seen the apex bank pump over $4billion into the forex market till date. But there are concerns in some quarters that such a measure is not just sustainable but poses serious threat to the nation’s foreign reserves. In this report, Ibrahim Apekhade Yusuf examines the issues
To say the future of the naira, the nation’s legal tender is most uncertain, is simply stating the obvious. Truth is the naira which has experienced a rather chequered existence these past months, may suffer its worse fate ever if nothing is done to halt the downward slide.
This is the damning verdict of some financial and economic experts, who have expressed their misgivings over what they described as the “incurably defective policies” adopted by the Central Bank of Nigeria (CBN) ostensibly to rescue the naira.
Crux of the matter
The CBN had in February announced a FX policy measures by the commencement of dollar sales for personal and business travel allowances as well as foreign education and medical fees.
Besides, the CBN announced the removal of the 60:40 FX allocation rule in favour of manufacturing companies, and reduced the tenor on its currency forwards to 60-days (vs 180-days previously) even as it signaled a desire for greater intervention to clear unfilled orders in the interbank FX market.
Thankfully, there was positive fallout from FX interventions as it halt bullish run on the naira yield curve. The naira yield curve trended higher in February (+16bps MoM to 17.31%) as system liquidity tightened following CBN’s Secondary Market Intervention Sales (SMIS) which drove overnight money market rate to 133.3% (from 6.9% at the end of January).
The SMIS helped offset impact of lower paper supply (as the CBN net issued N92 billion in OMO paper in February vs N701 billion in January 2017) which had resulted in the mounting liquidity at the short end that drove bullish sentiment in the T-bill market over the first few weeks of the month.
According to observers, the timing of the policy pronouncement, which came on the heels of the directive from the National Economic Council, a largely advisory but politically strong body, mandating the apex bank to take actions to stem widening parallel market premiums, hints at a shift in policy orientation at the top.
Importantly, the CBN shift followed the transfer of more executive powers to the Vice President, Professor Yemi Osinbajo, a supporter of greater NGN flexibility relative to the absent President Buhari who have long opposed naira weakness and advocated for dollar demand curtailment.
Strident support for CBN forex policy
As to be expected the apex bank has since justified the need for the foreign exchange policy, saying it will help shore up the naira.
Mr. Emmanuel Ukeje, the Special Adviser to the CBN Governor on Financial Markets, who spoke in an interview in Abuja described as baseless the argument by sceptics that the newly introduced foreign exchange policy would further weaken the naira.
The whole essence of the new policy, he noted, is to infuse dollar liquidity into the system and to ensure easy accessibility of end users.
According to him: “In the past we have had clamours that people were not able to pay their school fees, people were not able to buy BTA and that is why they had to go to the black market or parallel market. Now that the CBN have come up with a policy that has returned this into the confines of the inter-bank market and that of the bank, we believe strongly that this will take the demand off the parallel market and we expect that the Naira will strengthen as this goes on.
“In essence, it means that people who have children overseas and those who have to pay school fees or want to travel don’t have to bother rush to BDCs to be buying money or to go parallel market. “They can now source this easily from the banks and that for me, is a very big positive.’’
The CBN rolled out a new policy on forex policy aimed at easing access to foreign currencies for personal, business, travel, educational and medical purposes, among others. The CBN later provided $370.9 million to 23 banks to meet the visible and invisible requests of customers.
The CBN further directed all banks in the country to open foreign exchange retail outlets at major airports as soon as logistics allowed them.
Ukeje said to make foreign exchange readily accessible to customers, the CBN also eliminated stiff conditions in applying for Basic Travel Allowances (BTA) in banks.
“We have tried as much as possible to simplify the access of this particular fund. The issue of tax clearance, we all know that it has been an issue because not many people can produce their tax clearance and for those who can, some can also easily produce fake tax clearance and the process of verifying this is very difficult.
“Basically you are entitled to basic travelling allowance every quarter and up to the sum of 4,000 dollars. And mind you, there is a caveat as it’s only those that are 18 years and above that can access that.
“There is also a condition that you must be embarking on a journey that is not less than five hours. So it does not mean that when you are going to Cotonou or Ghana you come and apply for a BTA.”
He reiterated that to avoid round tripping, the policy allows for school fees and medical fees to only be paid directly to the school or hospital.
In the view of Mazi Sam Ohuabunwa, one time Chief Executive Officer of Neimeth International Pharmaceuticals while reacting to the CBN forex policy with regards to the health of the naira in a published article recently, said the apex bank deserves commendation.
According to the technocrat, having seen that the idea of pegging the exchange rate and restricting demand was not yielding the desired result, the CBN under a more progressive governmental supervision, changed gear in a more progressive way.
“They began to make a determined effort to increase supply, rather than pursuing the failed strategy of curtailing demand. Official weekly supply of foreign exchange to BDCs was resumed. This was followed by increased supply of forex to banks. Then a new window was opened for invisibles- school fees, PTA & BTA, medical expenses etc. All these immediately tempered the depreciation of the Naira and for the first time in two years, the naira began to appreciate in the parallel market climbing down from N520 to about N385 against the dollar.”
While lauding the move by the CBN, he said: “Almost immediately, the economic heat began to mellow. Inflation began to go down and production and other economic activities began to inch up. Not done with its new policy stance, the CBN opened a window for SMES to obtain $20,000 per quarter directly and then last week or so, the CBN opened the new forex window- the Import, Export and Investor window. Here the naira is finally allowed to float. Importers of foreign exchange and investors can now sell and buy dollars at market determined rate. It is my hope that the CBN will continue this progressive move and soon coalesce all the windows into one big door where the rates will be consolidated into one. With that a major economic recovery plan will have been achieved.”
Worries over CBN forex intervention
Not a few people have expressed worry over the current foreign exchange policy, which in their opinion is a smokescreen.
One of those who have raised his voice above the din is Dr. Obadiah Mailafia, a former Deputy Governor of the CBN.
Speaking in a monitored television magazine programme, the former CBN boss said that some analysts had advised the government to change the new policy in order not to deplete the country’s external reserve.
According to him: “The CBN, in the policy, said that in order to ease the difficulties encountered by Nigerians in obtaining funds for foreign exchange transactions, it would henceforth be providing direct additional funding to banks.
“This is to meet the needs of Nigerians for personal and business travel, medical needs and school fees effectively.
“The CBN said such retail transactions will be settled at a rate not exceeding 20 per cent above the interbank market rate.
“We cannot continue to do this forever without depleting the external reserves; if you deplete the external reserves, in fact, the naira can fall to 1,000 to a dollar.
“We should have a deliberate policy of working toward unification and integration of multiple exchange rates into the law of one price, so that there will be clear transparency in the system.
“It might involve going back to the Dutch option system that we had sometimes ago which did well, by the way,’’ he said.
Dutch option is a public offering auction structure in which the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold.
In the type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price.
Echoing similar sentiments, Mazi Okechukwu Unegbu, lawyer, arbitrator and stockbroker, is currently Managing Director/Chief Executive, Maxifund Investments and Securities Plc, while lauding the CBN governor for his concerted efforts at stemming the down ward slide of the naira, however lamented that the forex intervention is a rather kneel jet approach.
“When you come up with a policy some people will want to abuse that policy. I must say and agree with you that the CBN intervention in the foreign exchange market is not sustainable in a very long time. What the CBN is doing now is trying to cure the symptoms instead of the disease. I think we should look at the disease. What do l mean by the disease? The economic environment is not well structured to withstand what is happening now. What we’re doing now is offering palliatives to make sure something begins to happen. But while they’re doing that palliative, we must go back and check both the economic environment and the legal environment to be able to address the issues headlong,” he said.
Unegbu, who boasts of over 30 years career in banking and finance, recalled that in those days in the 70s, Nigeria used to invest their foreign reserves in negative interest. “In other words, people who were keeping our money said they won’t pay us interest rather they will do it like these Alajo people (local thrift collectors) who collect money and at the end they would take one month of what they collected from you. That’s exactly what they were doing with our foreign reserves in those days because we didn’t know what to do with our money then due to lack of proper economic managers.”
The former president/chairman of the Council of the Chartered Institute of Bankers of Nigeria (CIBN) said the nation’s forex policy should be rejigged.
“What we’ve always done is to use the fire brigade approach. Once there’s a problem, we start panicking or bring palliatives and in the process we mistakes. The best thing should be that while the palliatives are being done, we should now go and study properly the public finances of this country as well as study the type of income that we’re getting.”
One best way to encourage forex is to explore remittances from Nigerians in the diaspora. “Diaspora is a good accretion to our foreign reserves. As such, we should encourage them and make them feel that by investing their money they are investing in the future of the country. What they do currently is to just bring the little they have for their relations and all. That’s not good enough.”
Pressed further, he said: “For instance, if you go to Mexico, you find out that their citizens in the USA are pumping money into the Mexican economy to boost production activities and all that. With this, the country is able to withstand any pressure from a country like the USA in whatever they’re doing. So we must encourage our people in the diaspora because the private transfers from there are service earnings which really make a growth in the foreign reserves of the country.
“If we encourage these people to come in with their money and they bring it to the market place even if it’s in the open market, if there are enough demands and supply or excess of supply, the local currency will grow high whether or not the CBN is supplying. These are some of the things we need to do because the way the forex is being managed at the moment is not satisfactory and cannot ensure economic growth in the right direction on the long run.”
Like Unegbu, Dr. Bongo Adi, senior lecturer in Development Economics, at the Lagos Business School, Pan Atlantic University, also holds the view and very strongly too that the response of the CBN to the forex conundrum is not a technically appropriate one, especially when considered in the long term perspective.
“They are just putting in a short term palliative to what is actually structural problem. That is one. By the term they responded, it was a matter of too little too late. The harm has been done. Even though with CBN intervention since January when close to $5billion was injected into the exchange market, to douse the dollars scarcity. It has not really translated to lower living standard to average Nigerians,” he regretted.
Alhaji Aminu Gwadabe, President of the Association of Bureau De Change Operators of Nigeria (ABCON) while commenting on the new forex policy, feared that it will breed a new set of currency traders.
The ABCON boss noted that the directive by the CBN to commercial banks to sell dollars for school fees and medicals will “breed another FX traders between the banks and the end users.”
He pointed out that with this loophole, the apex bank will be unable to achieve its objectives in the short- term due to protracted liquidity challenges.
“The rate disparity between banks and the BDCs will definitely breed another FX traders between the banks and the end users.
“We will see the return of what is normally called the proliferation of bank’s treasurers/account officers turning to BDC operators overnight,” he said.
“Due to long time perverse lack of liquidity and the volume of FX done by the mega banks, the objectives will not meet the expectations of the CBN in the short term,” he added.
Gwadabe said further that, “The directive has added another rate to the lingering crises of the multiplicity of rates in the market and is highly skewed in favour of the banks.”
According to him, “The BDCs are not meant to be in competition with the banks. We are supposed to provide complementary roles.
“It is only in Nigeria that you want to buy 2000 dollars and you are meant to go to the banks and queue for two months, without allocations, which is in conflicts with the BDCs operations on cash and spot.
“The implication is that the BDCs will buy International Money Transfer Services Operators (IMTSO) proceeds at 381 per dollar and sell at N399 to a dollar, while the banks are to buy at N315 per dollar and sell at N375 per dollar for them to make their 20 per cent above the interbank rate.”
