It’s tough times for Nigeria’s economy. Nigeria’s source of FOREX receipts is mainly oil. Unprecedented decline in oil revenue means Government must take hard decisions to manage foreign exchange (FOREX). Imagine the impact of price falling from over $100 to less than $40 per barrel. With depleted FOREX reserve, benchmark of $38 per barrel was set for 2016 budget. On the day of budget presentation, price of crude fell below the benchmark price. Speculations are rife that price may fall to as low as $20 per barrel in the future.
At such a time as this, you’ll expect tough actions to be taken to manage FOREX. Government had to spend a major part of FOREX reserve to cushion the revenue gap as it continued to battle reduced inflows. Truth is, the volume of FOREX available is not enough to meet the demand for it. When demand exceeds supply, you know what happens. Simple demand and supply theory teaches that price of a commodity rises when demand exceeds supply, other things remaining constant.
Understanding this background is key to appreciating steps being taken by Government to manage the supply and demand sides of FOREX. It is tough enough to manage an economy in times of boom, let alone in times of challenging economic realities. Many actions were taken by Government to manage the pressure on Naira and stabilize the economy. Let’s look at some of these measures so as to better appreciate the impacts on individuals and businesses.
In November 2014, Naira was devalued from 160 to 176 to USD ($). This was followed by setting a new inter-bank rate of 197 in February 2015. Devaluation means more Naira income from a given USD proceed. It was hoped that this will reduce the pressure on Naira, but Naira has continued to be under massive pressure as the demand side keep growing while supply shrinks. At a point in the third week of December, Dollar exchanged for 285 at the parallel market although official exchange rate remained 197. There seems to be some momentary reprieve with influx of Nigerians in diaspora arriving for Christmas.
In April 2015, CBN invoked the provisions of CBN Act to prohibit pricing of goods and services in foreign currencies. Clarifications was later issued in May and exemptions were granted to organisations like revenue agencies, oil and gas business, aviation and operators in free trade zones as well as holders of foreign currency domiciliary account. It further reinforces the provisions of the Act which criminalises refusal to accept Naira as the legal tender currency for transaction in Nigeria. The intention was to reiterate Naira as the official legal tender and discourage unnecessary “dollarization” of the economy. Businesses are to be transacted in Naira thereby removing unnecessary demands for Dollar for transactions that were consummated in Nigeria. A common example of this are cases of landlords demanding that rental agreements be negotiated in USD and payment made in Dollars.
In June 2015, CBN issued a Circular banning a total of 41 imported items from eligibility to access official FOREX. These items were not prohibited for imports but were not valid for FOREX. Importers of these items must source their FOREX from private sources, outside interbank, export proceeds and BDCs. The 41 items include furniture, cement, clothing and other ridiculous imported items like toothpicks. The main motivation for this was that the items should be available locally or that local production is being encouraged. Some of the items were also considered as frivolities and Government is unwilling to provide its scarce FOREX for such. It is indeed disheartening to know this harsh reality that some of these items were being imported and not being sourced/produced locally.
In August 2015, commercial banks in the country suspended acceptance foreign currencies cash deposits. According to the Banks, this was done to curb widespread currency speculation that was putting pressure on Naira. Some Banks even cited the influx of foreign exchange cash deposits into the banking system and lack of capacity to store FX cash deposits. The CBN subsequently issued an official policy statement to proscribe acceptance of foreign cash deposits by commercials banks operating in the country. As part of the measures, foreign currency cash deposits into domiciliary accounts made prior to the notice were ineligible for outward electronic transfer and can only be withdrawn as cash. Only inflows by wire transfers could be remitted by wire transfers. As usual, Naira strengthens a little after the policy was introduced but things return to normal not long afterwards.
The foreign exchange market was said to have been flooded by illicit fund flows and money laundering going through the Nigerian financial system. The general elections were held in 2015 and electioneering campaign is a major money spinner. It was identified that this was contributing significantly to weakening the Naira thereby necessitating increase vigilance to ensure that Nigerian banks are not used as conduits for illicit fund flows and money laundering in foreign currencies.
Still in August 2015, daily cash withdraw from foreign ATMs were reduced to equivalents of $300. Annual limit on the usage of Naira denominated cards, which was initially $150,000, was also cut down to $50,000. Customers were asked to get foreign currency denominated cards linked to their foreign currency domiciliary accounts to continue to have unlimited access to their funds while abroad.
The CBN rolled out the policy of mandatory Bank Verification Number (BVN) for all account holders with an initial deadline of 30 July 2015. Following pleas and agitations on the eve of the deadline, extension of three months was granted. By the deadline of 30 November, bank account holders were expected to have obtained their BVN which links all their accounts together. Account holders in the diaspora were allowed till 31 January 2016. As far as the FOREX control policies are concerned, the implication of having BVN linked to all bank accounts is that usage of multiple cards from different banks by an individual would not be possible.
As scarcity of FOREX continue to bite harder and Banks continue to find it difficult to meet their obligations to foreign merchants, some Banks have now stopped usage of Naira denominated cards abroad. Some Banks issued statements to commence this policy from 1 January 2016. Other Banks have barred debits cards from all form of transaction within Africa. This extends to ATM withdrawals and POS transactions outside Nigeria. Customers are being asked to get PTAs and BTAs for their travels but this itself is as hard as it gets. Customers are being asked to open domiciliary account, fund it by privately sourced wire transfers and get a Debit Card linked to the doc account.
Without doubt, businesses and individuals are feeling the impacts. Holiday makers aren’t finding it easy and businesses are groaning under the weight of these measures. The Manufacturers Association of Nigeria has asked CBN to stop FOREX allocation to BDCs and make direction allocation to manufacturing sector.
The truth is that there is no easy fix for the FOREX issues. Until Nigeria is able to earn enough FOREX from exports, it must continue to look at effective utilization of available proceeds. Both the supply and demand sides need simultaneous actions and these won’t be without some pains. The system itself has been so bastardized with rent-seeking and round tripping activities. Sanitizing the system will require some measure of pain from everyone. Government’s attempts at reshaping the mentality of Nigerians towards looking inwards will not be easy. We can’t continue to get fixated on imports. People boast about importing every piece of item in their kitchen. Even my toothpicks are imported, they’ll boast!
The policy hurts, but there’re no many options available. No pains, no gains. It may seems as though the system is being shut down for a hard reboot. It is soothing to note that Government appear fully aware of this temporary challenges and would be expected to loosen up a little where it can. President Buhari acknowledged this much in its 2016 budget speech. I will take the liberty to reproduce some sections of the 2016 Budget presentation speech to the National Assembly in the last three paragraphs that follows.
I am aware of the problems many Nigerians currently have in accessing foreign exchange for their various purposes – from our traders and business operators who rely on imported inputs; to manufacturers needing to import sophisticated equipment and spare parts; to our airlines operators who need foreign exchange to meet their international regulatory obligations; to the financial services sector and capital markets who are key actors in the global arena. These are clearly due to the current inadequacies in the supply of foreign exchange to Nigerians who need it.
I am however assured by the Governor of Central Bank that the Bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure.
We are carefully assessing our exchange rate regime keeping in mind our willingness to attract foreign investors but at the same time, managing and controlling inflation to level that will not harm the average Nigerians. Nigeria is open for business. But the interest of all Nigerians must be protected. Indeed, tough decisions will have to be made. But this does not necessarily mean increasing the level of pain already being experienced by most Nigerians. So to the investors, business owners and industrialists, we are aware of your pains. To the farmers, traders and entrepreneurs, we also hear you. The status quo cannot continue. The rent seeking will stop. The artificial current demand will end. Our monetary, fiscal and social development policies are aligned.
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