By Rilwan Saka
In recent times, the Nigerian currency, known as the Naira, has experienced a significant depreciation in value. Some analysts argue that the scarcity of foreign exchange (FX) is the primary factor contributing to the situation, while others contend that it is a consequence of the current administration’s flawed strategy regarding the unification of FX markets. Given Nigeria’s substantial dependence on imports, it is imperative that immediate action be taken to stabilise the Naira. The current foreign exchange crisis in Nigeria has disproportionately affected the general population, the overwhelming majority of whom are already burdened by a high cost of living due to fuel subsidy removal.
The evolution of Nigeria’s FOREX market has been shaped by several factors including institutional transformations that are frequently inspired by classical economic theories. However, the peculiar nature of Nigeria’s FX crisis makes it unlikely that such theories can be the sole panacea. Classical economic theories, which are based on the assumptions of rationality, are different from behavioural economic theories that are founded on assumptions of normality. I belong to the latter school of thought: the significance of psychology in market behaviour. Beyond macroeconomic fundamentals, human sentiment largely determines financial market outcomes. Behavioural economics has had a significant impact on a number of areas, including government policies and its underlying premise posits that the manner in which choices are framed can influence individuals’ decision-making, even when confronted with an abundance of options.
Now, let me contextualise into layman’s perspective! Market analysts have praised Nigeria’s current FX system as astute and profound. The system allows importers to source for FX through various means among which are: VALID FOR FX, NOT VALID FOR FX, LETTER OF CREDIT AND ADVANCE PAYMENT. In its wisdom, current administration has unified the FX market to limit arbitrage and speculation. However, traders have taken advantage of the limitless choices available in the FX system since they have realized that Central Bank of Nigeria (CBN) doesn’t have enough dollar to defend the market. Anecdotal evidence shows that the apex bank has a massive backlog of FX requests plus a combined $13.5b debt owed to JP Morgan and Goldman Sachs in securities lending. These outstandings must be cleared from the CBN books, but the current financial condition of the institution presents a significant obstacle, exacerbated by the ongoing need for foreign currencies.
In Nigeria, a significant proportion of foreign exchange demands, approximately 70%, is attributed to importers who require FX for the purchase of finished goods, machinery, and raw materials. The remaining 30% goes to medicals, education, business travel allowance (BTA) and personal travel allowance (PTA).
Let’s begin with the 70% demographic group. Following the recent unbanning of 43 items, I had anticipated that the CBN would make it mandatory for all FX requests to pass through an independent import and export (I&E) FX window. This is how I expect it to work: As an importer, after receiving proforma invoice from a foreign supplier, the next step is to proceed to I&E window in order to submit a request and apply for FX. An I&E window approval code would be automatically generated once a request is submitted.
The premise of my position is straightforward! In the same way that it is currently impossible to import commodities into Nigeria without a validly registered form M, importers must be required to use the I&E window to source dollars. Although the I&E window has been in existence for several years, the intended goals have not been met because many importers continue to source dollars from the parallel market outside of the window due to the bureaucracies surrounding the I&E window. As an importer, the value on your Form M should correspond with your FX requests at the I&E window. By doing so, we can ensure that each dollar spent on imports is accounted for, thus eradicating speculative and parallel markets. This procedure is especially crucial in light of the fact that bankers have converted banking halls into liaison office for bureau de change operators. Once there’s no demand for FX from the black market, BDCs and speculators will be forced to key into the system and sell via I&E window, leading to gradual stability of the Naira.
CBN must ensure that the I&E window is highly regulated and devoid of third parties, just as the stock exchange market. Rules that prohibit arbitrage and insider trading must be unambiguous and enforceable. In the I&E window, CBN must impose a price ceiling such that no seller may offer their FX for sale at a price exceeding the threshold set by CBN. In order to optimise efficiency, the system must operate autonomously and in an algorithmic fashion.
As for the remaining 30% demography, they must be ready to pay a premium because a chunk of their FX requests are non-essentials with local substitutes. To enable for backward integration and make Nigeria a manufacturing country, every item with a local replacement should be discouraged from import. However, for the sake of flexibility, these requests should also pass through the I&E window, albeit a different segment. For instance, international applicants seeking to remit acceptance fees must submit a request for payment through their banks to the I&E window. The CBN would then establish a direct payment arrangement with the institution.
Medicals bills abroad should be given priority but subject to medical reports certified by directors of reputable government hospitals and report must demonstrate that the nature of illness requires urgent medical attention to warrant immediate transfer of FX to hospital account abroad.
With regards to BTA and PTA requests, they should not be given in cash or put in an account. Instead, a non-transferrable ATM card should be issued, and this can only be used abroad for shopping and service payment. The ATM card should also be valid for the duration of trip and any unspent balance would only be exchanged into a Naira account via the I&E window. Furthermore, expatriates working in Nigeria shall be paid Naira equivalent of their dollar salary in a Nigerian domiciled account.
Lastly, CBN should also introduce cashless policy for FX in Nigeria. Experience has shown that many people keep dollars at home with the mindset of speculating and selling when FX rate goes up. Dollar has now become a store of value and an alternative preferred medium of exchange other than the country’s legal tender. It is possible that the value of dollar in circulation outside the financial system may be enough to take care of the country’s current FX needs. The apex bank needs to formulate a policy to mop those monies into the financial market. Individuals and corporate organizations must be encouraged or perhaps given ultimatum to deposit all dollar cash in hand into their respective bank accounts.
Solutions to Nigeria’s FX crisis are not a rocket science! It is up to Nigerians to have a change of mindset.
• Dr. Saka is an Assistant Professor in Finance. Edinburgh Napier University, UK