A new policy regime announced at the weekend by the Central Bank of Nigeria, allowing a market-driven approach to the foreign exchange market may be counterproductive both in the short, medium to long term, experts have argued, reports Ibrahim Apekhade Yusuf
Mixed reactions have trailed the latest policy announcement by the apex regulating body of banks in Nigeria, allowing the deposit money banks (DMBs) to freely determine the rates for all foreign exchange within the banking system.
The Central Bank of Nigeria (CBN) had in a circular FMD/DIR/PUB/CIR/001/012 signed by Duke, Omolara Omotunde, its Director of Financial Markets Department and addressed to all Authorised Dealers that the CBN had “removed the spread on foreign exchange transactions” thus signaling a market-driven to the sale of forex.
In the statement which reads in part, Omotunde said, “the Bank hereby discontinues any cap on the spread on interbank foreign exchange transactions and restrictions on the sale of interbank proceeds.
“Authorised dealers are to continue to conduct their foreign exchange transactions on a “Willing Buyer and Willing Seller” basis. In addition, they are to strictly adhere to high ethical standards in their dealings in the foreign exchange markets. This includes but not limited to adopting appropriate price disclosures and transparency for transactions.”
This means that they’re letting the market decide the price of foreign exchange.
This move aims to enhance transparency, efficiency, and flexibility in the FX market, ultimately benefiting individuals and businesses.
Hitherto, the CBN imposed limits on the difference between buying and selling prices for FX, known as the “spread.”
However, these caps have now been lifted, enabling banks to establish their own prices based on supply and demand. This allows the market to determine the “fair” price for foreign currencies, particularly the US dollar.
Banks now have more flexibility to sell FX to anyone they choose. This change could result in quicker and more convenient access to foreign currency for both businesses and individuals.
Despite the increased freedom for banks, the CBN has also stressed the importance of transparency.
Thus, banks are now required to clearly display their prices, refrain from deceiving customers, and report all transactions to the CBN.
The CBN anticipates that this new approach will: Promote fairness and efficiency in the FX market. By allowing the market to determine prices, the CBN aims to eliminate artificial distortions and ensure that everyone can access FX at a reasonable price.
The apex bank also intends to encourage greater foreign investment. That is by simplifying the process of buying and selling FX, the CBN wants to attract more foreign investors, which could stimulate the Nigerian economy.
Besides, the CBN hopes that by making official FX more accessible and transparent, it will discourage the use of the black market, which can be risky and illegal.
With banks determining their own prices, customers may find better deals on FX compared to the previous system: also, before conducting a transaction, customers should be able to easily compare the prices offered by different banks, as prices are set by the market, FX rates may become more volatile.
The CBN in the circular noted that it will continue to monitor the market and make adjustments as required.
Investigation by our correspondent at the weekend that the exchange rate for a dollar to naira at the black market) did not show any significant improvement as the operators bought a dollar for N1495 and sold at N1500.
Divergent views on new policy regime
In the view of Peter Adebola, a financial analyst, the latest in the raft of policies announced by the CBN is purely cosmetic and not capable of restoring confidence in the economy ultimately.
Adebola, who is the Managing Director Edgefield Capital Management Limited, an investment-driven company with interest in major commanding heights of the economy, noted that while the lifting of the spread may be good on the surface, it however begs the fundamental issues of how to restore confidence in the economy.
“It’s a good decision alright, but how is it going to translate to gains for the naira itself? Some have also argued that it’s going to make naira to get its appropriate value on the one hand and make the market more efficient. Of course, there has been a lot of argument that the naira is overvalued or undervalued. Now with a market-driven process in place we will be able to know what is the true worth of the naira,” he stressed.
While noting that the best measure of determining the value of any product and service is a market-driven price, he was however quick to point out that the government needs to tackle thee more fundamental issue of insecurity, which according to him touches the nerves of almost everything as far as the efficiency and effectiveness of any socioeconomic policy.
“The mainstream media was still awash with the news of kidnapping this morning (Saturday) and our security operatives are still reactive as against being responsive. With this festering insecurity economic activities either in the formal or informal sector cannot be guaranteed as such we will continue to experience downtime with our farmers unable to go to farm and produce food, other sectors would also take the heat. So at the end it’s still the same old story. The government needs to tackle this fundamental issue frontally and every other measure being put in place to address other teething economic problems would be effective.”
Like Adebola, Adeoye Lambo, an accountant in Otta, a suburb of Ogun state, also argued that the measures adopted by the CBN to address the FX crisis is merely skirting around the issues and has no way of addressing the root cause of the crisis.
That said, he was however quick to admit like Adebola that it may help to rein in the antics of forex speculators even if temporarily.
Other stiff measures to manage FX crisis
Apparently miffed by the unprecedented devaluation of the naira caused in part by the activities of certain forces, the Economic and Financial Crimes Commission (EFCC) had also joined the battle to halt further depreciation of the naira against the dollar.
It launched a crackdown on dollar speculators, hoarders, racketeers and firms issuing invoices in foreign currency.
The anti-graft agency said it had raised 14 special task forces to fish out culprits.
The anti-graft agency, which announced the arrest of many racketeers in Lagos, Port Harcourt and Kaduna, said each task force will operate from the agency’s 14 zonal commands.
It has also been invited for questioning some proprietors of privately run varsities and higher institutions who charge fees in dollars.
The development came on a day the Association of Bureaux De Change Operators of Nigeria (ABCON) requested that the Central Bank of Nigeria (CBN) allow its members to resume dollar sales.
In a statement by its Head of Media and Publicity, Mr. Dele Oyewale, the EFCC said the task forces will ensure “the enforcement of extant laws against currency mutilation and dollarisation of the economy.”
“The task force, inaugurated by the Executive Chairman of the Commission, Ola Olukoyede, was raised to protect the economy from abuses, leakages and distortions exposing it to instability and disruption.”
The CBN frowns at the use of foreign currency as a medium of exchange in Nigeria.
In a statement by its erstwhile Director, Corporate Communications, Ibrahim Mu’azu, the apex bank drew attention to the consequences of contravening the provisions of the CBN Act of 2007.
According to the Act, “the currency notes issued by the bank (CBN) shall be legal tender in Nigeria…for the payment of any amount.”
The statement reads: “The attention of the Bank has been drawn to the increasing use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporates.
“It has also been observed that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the naira), which is the legal tender in Nigeria.
“For the avoidance of doubt, the attention of the general public is hereby drawn to the provisions of the CBN Act of 2007, which states inter-alia: ‘the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount’.
“Furthermore, the Act stipulates that any person who contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.
“This prohibition, however, is without prejudice to foreigners, visitors and tourists who are encouraged to continue to use their cards for payments or exchange their foreign currency for local currency at any of the authorised dealers’ outposts.
“The general public is hereby advised to report any contravention of the provision of this Act to the Economic and Financial Crimes Commission (EFCC) and the Central Bank of Nigeria (CBN) for appropriate action.”
In a separate statement, the EFCC said its operatives in the Kaduna Zonal Command arrested three persons in connection with suspected currency racketeering.
It listed the suspects as Musa Gideon, Abdul Seidu Adamu and Justine Musa.
“The operative, a member of the special task forces set up for the enforcement of extant laws against currency mutilation and dollarisation of the economy, functioned in a sting operation carried out by the team.
“The operation yielded the arrest of the three suspects selling new and old naira notes to the tune of N1, 307,400 and in possession of many Automated Teller Machine (ATM) cards.
“The suspects would be charged to court as soon as investigations are concluded,” the EFCC statement said.
Also, in its determination to help with the CBN’s quest to address the lingering FX crisis caused by the scarcity of the greenback, the operators of the International Money Transfer (IMTOs) had announced plans to stop transfer in dollars but will now only pay in naira.
The decision, the operators said, was based on the recent directive by the CBN, restricting their operations only to inbound transfers.
The CBN in a circular addressed to IMTOs, recently ordered the operators not to facilitate money transfers from Nigeria to other countries.
The apex bank described the new directive as a move to “liberalise the foreign exchange market and ensure transparency.”
Despite a devaluation last year and a decision to float the Naira, the currency has witnessed even more volatility as the CBN attempts to clear forex backlogs worth about $7bn.
The old guidelines dated 6 September 2014 did not provide a clear definition of IMTOs. The definition was implied from the permissible activities that the operators could undertake however, under the New Guidelines, IMTOs are defined as companies approved by the CBN to facilitate the transfer of funds from individuals or entities residing abroad to recipients in Nigeria and the payment of a corresponding sum to a beneficiary through a clearing network to which the IMTO belongs.
However, under the revised guidelines, the IMTO services are now limited to inbound money transfer services alone. This means that IMTOs are only able to provide money transfer or remittance services from a foreign country into Nigeria.
The apex bank asked IMTOs to quote exchange rates for naira payout to beneficiaries based on the prevailing market rates at the nation’s official foreign exchange market.
Checks on the website of one of the approved IMTOs, World Remit, showed that it has updated its app for Nigeria with the following instructions: WorldRemit Nigeria News! We can no longer support transfers in USD; only in Naira.
“If you’re about to send money to Nigeria, this is important. The Central Bank of Nigeria has directed that it’s no longer possible for any money transfers to be paid out in USD in Nigeria. So, of course, this includes WorldRemit money transfers.
“But please don’t worry. You can still enjoy the same quick, safe, and affordable World Remit service to Nigeria by sending money in Naira instead,” it stated.
Ditto for Sendwave, which also hinted on its website that, “In compliance with a recent directive from the Central Bank of Nigeria, we regret to inform you that Sendwave, along with all money transfer operators, is no longer able to support USD transfers to Nigeria. We’d encourage you to switch to sending Naira transfers instead.”
How overseas education, medical tourism worsen FX crisis
In a related development, the CBN Governor Yemi Cardoso, said that the amount spent on foreign education and medical tourism contributes to Nigeria’s foreign exchange challenges.
In a detailed presentation to the House of Representatives last Tuesday, Cardoso highlighted that an alarming $40 billion has been expended on foreign education and healthcare, a factor contributing to the devaluation of the Naira, which has plummeted to over N1,400 in the official market.
Cardoso said: “Given this data, it is crucial to highlight that between 2010 and 2020, foreign educational expenses amounted to a substantial $28.65 billion, according to the CBN publicly available balance of payment statistics.
“Similarly, medical treatment abroad has incurred around $11 billion in costs during the same period. Consequently, over the past decade, foreign exchange demand for education and healthcare has totalled nearly $40 billion.
“Notably, this amount surpasses the total foreign exchange reserves of the CBN. Mitigating a significant portion of this demand could have resulted in a considerably stronger naira today.”
The CBN boss also said that Personal Travel Allowances (PTAs) cost about $58.7 billion in 10 years, adding that the apex bank released $9.01 billion to Nigerians for personal foreign travel between January and September 2019.
The CBN governor also decried the amount of pressure in the foreign exchange market amidst forex scarcity, which adds to the depletion of naira value.
He said: “Nigerian foreign exchange market is currently facing increased demand pressures, causing a continuous decline in the value of the naira.
“Factors contributing to this situation include speculative forex demand, inadequate forex supply due to non-remittance of crude oil earnings to the CBN, increased capital outflows, and excess liquidity from fiscal activities.”
The CBN governor noted that with the huge demand for foreign education, healthcare, professional services, personal travel, and similar needs, the exchange rate faces significant pressure.
“On the supply side of the exchange rate, to bolster the inflow of US Dollars into a country, the economy must “earn” these dollars through exports, whether oil or non-oil or by attracting foreign investments,” he noted, adding that “A robust economic foundation is essential to produce goods and services that the global market is willing to pay for in US Dollars. When such supply surpasses demand, the exchange rate appreciates, causing the price of the dollar to fall. Unfortunately, in Nigeria, the contrary has taken place.”
The CBN has been actively managing these expenditures through its approved rate for school fees and healthcare payments. Cardoso pointed out a notable shift in the pattern of demand for Personal Travel Allowance (PTA) for overseas education fees, a trend that has evolved considerably since the early 1990s.
Reforms ongoing
Cardoso also said the CBN is making critical reforms to address exchange rate volatility. Some of these reforms include unifying FX market segments, settling outstanding FX obligations, introducing new operational mechanisms for BDCs, implementing the Net Open Position limit, and amending the remunerable Standing Deposit Facility cap.
