Dollar scandal

• Why Nigeria’s forex market is under pressure

By our reporters

Johnbull Ebong, a young Nigerian student had just passed out of a popular secondary school in in Lagos. While in school, has never hidden his frustration about Nigeria’s educational system, which was the reason he and his father Samuel , had made up their minds that he would study at the prestigious Cambridge University in the United Kingdom. But just as they were rounding off his admission process, a major setback crept in. The naira, the nation’s currency had crashed and what was budgeted for his education in the UK can barely afford a few items at the moment.

Today, the young man’s educational pursuit seems to have been truncated for now and he is lamenting being born in a country where nothing works.

But the frustrations of this family, may not be different from the experiences of Olamiji Adeoye, a Small and Medium Enterprise promoter, who over the past six years had sourced the raw materials for his factory from China.

Through a dint hard work and perseverance, his  manufacturing plant located around the Alaba International market in Ojo area of Lagos State, had grown its workforce to about 23 working to meet the needs of other SMEs and households around the city.

But when the naira exchange rate soared to over N475 to the dollar, last year, the budding industrialist discovered  the business has become so uncompetitive and unprofitable that continuing would only mean postponing the evil day.

To avoid accumulating debts on some facilities he took from commercial banks, Adeoye opted to shut down the business thereby sending all his employees into the labour market while veering off into transportation and haulage business just to meet the basic needs of his family..

The above two scenarios often relive  the unpleasant experiences of several Nigerian households and businesses that are being held hostage by the inefficiencies of the Nigerian foreign exchange market regime administered by the Central Bank of Nigeria. 

Despite flooding the markets with $530 million, which revved up the naira in the last two weeks economic experts say there is no need for premature celebration as the Central Bank of Nigeria (CBN) needs to show sufficient proof of its ability to sustain the tempo for a long period since the forex intervention, so far, does not cover high-end spenders like fuel importers and manufacturers.

For many stakeholders, one major setback of the CBNs current foreign exchange strategy is the multiplicity of exchange  rates  prevailing at various segments of the market each of which comes with some measure of distortion that often makes stability a Herculean task.

Perhaps Nigeria may pass as the only country in contemporary global economy where many exchange rates operate simultaneously in the same economy.  In Nigeria for instance, despite pegging the official rate at N305 to the dollar, while the interbank sells for N315 to one dollar, the central bank still has another rate Muslim and Christian faithful on pilgrimage to Mecca or Jerusalem respectively.

There are also different rates for bureau de change segment and also for the parallel and black market segments. 

But despite its hard stance on bridging the yawning gap between the official and parallel market rates, Sunday Sun investigations show that the apex bank still permits concessional foreign exchange allocation to some business entities and sectors of the country’s economy considered critical to the country’s economic development and job creating initiative of the government.

But those who should know, have often blamed the CBN for creating opportunities for the mindless depreciation of the naira across several segments of the market.

Nigeria currently has close to 3,500 registered bureau de change outlets in the country, with many having links with several past and present executives of the apex bank.  Many fear that was creating room for wider disparities in exchange rates and not giving any reprieve for the naira under the prevailing foreign exchange management system. According to most commentators, these differing rates have also created significant distortion in the entire foreign exchange management strategy of the apex bank

Many insist the apex bank has to work harder with various economic players to gradually pan the country away from a deep import dependency to an export oriented economy.

According to them, the CBN should devise stricter measures to ensure the forex allocation  is not abused by ensuring that only those with genuine programmes are funded at each intervention.

A former Managing Director of Unity Bank, Rislanudeen Mohammad, in a chat with Sunday Sun said the CBN’s intervention last week was a very good step towards arresting challenges of excess demand, speculative demand and round tripping.

He, however, added that consistency, transparency, abolishing multiple exchange rates and assured integrity from the CBN would help generate more dollar liquidity from other sources especially foreign portfolio investors thereby helping to provide stability to bridge the gap between official and black market rates. 

“Even with improved reserves due to reduced restiveness in Niger Delta and appreciating price of crude oil, CBN may find it difficult to, in the medium to long term, to meet the insatiable dollar demand of an import dependent economy like ours without private injection of more liquidity in the market. 

“We should aim at seriously strategizing  towards reducing import dependency while expanding our export income base,” he advised.

Also commenting on how the tempo could be sustained, a financial expert, Dr Uche Uwaleke  urged various economic stakeholders to support the CBN to boost agriculture and other sectors where Nigeria has a competitive advantage, by encouraging local production.

He added that creating the enabling environment for local manufacturers would reduce the pressure on foreign exchange demand. 

Uwaleke made the call at the 23rd Seminar for Finance Correspondents and Business Editors  held in Sokoto.

Dwelling on the theme, ‘Enhancing Domestic Production as a Panacea For Growth and Foreign Exchange Conservation” Uwaleke urged the CBN to identify specific imported goods which could be produced locally and provide incentives for small and medium scale enterprises to increase the production of such goods.

According to him, CBN should pay more attention to agriculture in its intervention programmes since agriculture remained the largest employer of labour in Nigeria, adding that a significant percentage of the current demand for forex goes directly to importing agricultural produce.

On the apex bank forex policy on education abroad, he said that the CBN had not taken strict measures to avoid manipulation of the process by some fraudulent people, who could possibly present fake letters of admission to access foreign exchange.

Meanwhile, the Nigerian Organised Private Sector (OPS) has blamed the Federal Government’s  policy inconsistency and undue politic‎al interference in monetary policy management of the CBN for the multiple exchange rates in the nation’s foreign exchange market.

The stakeholders in the sector who expressed divergent views on what could have led to the multiplicity believed that solution to the restoration of naira might not be anyway in view, in spite of the current intervention by the Central Bank of Nigeria (CBN).

For instance, Nigeria Employers Consultative Association (NECA), argued that as long as the CBN could not meet the dollar demands of the economy, the regime of multiple rates would continue to persist.

The Director General of NECA, Dr Olusegun Oshinowo in an interview with Sunday Sun noted that there would not have been any need to look elsewhere for foreign exchange if CBN was able to meet all requirements at affordable rate.

He said, “CBN should make dollars available to all windows, what they are doing now is part of the efforts to correct the mistakes of the past, but is it sustainable? With the way things are I don’t see CBN sustaining it as the demand still exceeds the supply and that means we may probably be back to the old multiple rate.”

Oshinowo, however, said the way to sustain the dollar crash would be for CBN to determine the flow of its own naira.

According to him, CBN could combine the two policies together, the current intervention and free float of the naira.

He explained that the free float of naira without any hindrance from the authority would make naira to find its level.

According to him, once this happens, there would be more in flows of foreign investment from overseas, because this would encourage more foreign investors and Nigerians in the Diaspora to bring their dollar into the country.

“Egypt did the same against pound sterling when the country experienced similar challenge we are facing now, and now it has a better currency,” he said.

Also commenting on the  crisis in the nation’s foreign exchange market the President of the Manufacturers Association of Nigeria (MAN),  Frank Jacobs, said that the problem still boiled down to policy inconsistency.

“Our monetary policies are not consistent. The usual thing is to have ‎official rate and black market rate, rather than having multiple rates for different transactions in the economy. 

It’s just due to inconsistencies in our monetary  policy, that you have one rate today and something else tomorrow, which is really not good for an economy like ours, he said.

For its part, the Lagos Chamber of Commerce and Industry (LCCI) equally said‎ the multiple exchange rates was a reflection of the shortcomings in foreign exchange management strategy.

The LCCI Director General, Muda Yusuf, said such shortcoming was the consequence of over-regulation and the administrative model of allocation of foreign exchange. 

He said, “Discretionary allocation of Forex would typically create problems of uncertainty and transparency. This is detrimental to investors’ confidence and the desire to accelerate the economic recovery process.” 

The LCCI boss also noted that the huge disparity between rates was more disturbing, as it more or less fueled speculation and round tripping in the foreign exchange market. 

Yusuf said the current Forex regime was also constraining in flow of foreign exchange from autonomous sources.  

“The current situation creates a big incentive for demand for Forex and a major disincentive for the supply of Forex. This is a challenge and a dilemma that needs to be urgently resolved,” he said. 

He, however, opined that the way out, was to put in place a framework that would give a bigger scope for the market to allocate foreign exchange, arguing that a market model way generally more equitable, more transparent and more predictable. 

He said, “Of course, the Central Bank would intervene from time to time to stabilise the market, as there  could also be other monetary, fiscal and trade policy measures that could be adopted to support critical sectors of the economy. A market driven exchange rate would significantly improve supply from autonomous sources and reduce the pressure on the Central Bank of Nigeria, as well as on the nation’s foreign reserves.”

On the recent intervention by the CBN, Yusuf said it actually had a salutary effect on the exchange rate at the retail end of the market, as those  interventions were essentially about school fees, medical bills, BTA and PTA, which, he said, had very positive impact already reflected in the moderation in the exchange rate at the BDCs and parallel market. 

But sharing the same doubt as the NECA DG, Yusuf  said the question, remained whether the positive trend was sustainable. 

He said that the worry was that the CBN remained the main supplier of Forex in the market and so far there was still the challenge of liquidity in the Forex market for key players in the economy such as the importers of raw materials, importers of petroleum products, importers of capital equipment etc.

“It is doubtful, whether this category of importers can readily access foreign exchange at the official window. It is also doubtful whether foreign investors can readily remit dividends and profits from the official window. These are issues that we need to urgently address,” he stressed. 

But commenting on the measures taken by the apex bank, Mr Emmanuel Ukeje, the Special Adviser to CBN Governor on Financial Markets, said the new foreign exchange policy would help strengthen the value of naira in the market.

Ukeje further said it was in an attempt to make foreign exchange readily accessible to customers, that the CBN had also eliminated stiff conditions in applying for BTA in banks.

“The central bank has waived tax clearance provision in accessing these funds.  However, your journey must originate from Nigeria.

“You cannot live overseas and apply to buy BTA to travel. You must have a valid ticket to travel with and a bank account as well as BVN to be recognised as a bank account holder.

Even with its  intervention a fortnight ago to ease foreign exchange(forex) shortage for retail end users in the country,  the inability of the banks to lap up the offer, in the face of demand backlogs, might have told a different story about forex scarcity in the country. This could also be an indication that the authority would need to further evaluate the real scope of demand and supply in the market.

For instance, in its first intervention in the market, the CBN had offered $500million for sale to the banks, but not all on offer  found its way to the banks’ vaults to meet customers’ requests as the 23 banks could only absorb $371million.

A breakdown showed that seven banks received full allotments of their respective bids valued at $37.5 million each, while the rest banks got what ranged from about $15.6 million t0 $46. 5 million.  

The CBN also on Tuesday, February 21, 2017, made spot sales of $1.5 million to four banks, totaling $6 million. The bank also offered $41 million for sale out of which $35 million was taken up for the payment of school fees, medical bills and personal and business travel allowances.

The bank on Monday,  February 27, released another $100m into the wholesale forwards segment of the market in addition to pushing in some  $80m into the banks specifically for the settlement of dollar demand for school fees, medicals and Personal Travel Allowance (PTA), among others. These interventions kept naira gaining points against the dollar. From about a low of N530 a fortnight ago the naira appreciated to about N425 to the dollar at the parallel market. However, towards the end of last week it lost some ground against the dollar. Last Thursday for instance, it fell to N466.75 raising concern that the effects of the intervention were already waning.

Recall that in a release by its spokesman, Isaac Okorafor, the CBN said that its commitment to providing enough forex for legitimate business remained unshaken, reiterating that it would do “everything possible” to ensure the steady supply of forex to the market.

The question many have been asking since these interventions is whether the CBN’s new posturing can also meet the need of fuel importers, airlines operators, multinationals and other businesses in the economy that depend heavily on forex utilisation for their operation. Does it have the capacity to meet the need of investors who want to repatriate dividend considering that an estimated $600million trapped in the Nigerian financial system was largely responsible for the exit of several foreign airlines from Nigeria in 2016. 

Observers believe that until these questions are affirmatively answered by the CBN, the question of sustainability of the current policy would continue to linger

For instance, some have argued that manufacturers were left out in the apex bank’s recent interventions since the focus appears to be on the retail end of forex allocation.

But Mr Nnamdi Okafor, the Managing Director of May & Baker Plc, tend to dispute that.

According to him, as part of the Pharmaceutical manufacturing arm of the Manufacturers Association of Nigeria(P-MAN), things had begun to look up.

Hear him: “I am happy to say that, it would appear that, in the last two weeks or thereabout, there has been  some significant improvement in the kind of response we are getting from our banks. We have been able to get almost a million US dollars to take care of some backlogs of mature Letters of Credit (LCs).If I want to go by what I read, I look forward to getting some good news from our banks that all those mature LCs have been fully taken care of. So I would say that things suddenly appear to be looking better.”   

According to the CBN spokesman, making available large amounts of forex to the market, had caused appreciation of the naira by over N85 in less than one week. “There are fears in the market that the local currency may well be on a permanent journey to its natural value put by some analysts at less than N300 to the dollar,” he added. On a radio programme last Monday, Okorafor warned market players and keepers of dollars to make hay and sell their holdings in order to avoid heavy losses.

As naira started clawing back some of these losses due to the new foreign exchange policy, how far can the apex bank go in flooding the market with the much-needed dollars?

Dr Uche Uwaleke, the Head of Banking & Finance Department of the Nasarawa University, Lafia, argued that the stability in market would depend on the ability of the CBN to continue pumping the greenback to sanitise the huge demand pressure.

Hear him: “Whether it will be sustainable depends on the supply side.  It is demand and supply that will determine that.  But the only way I think it can be sustainable is if the CBN can get enough forex to be able to defend the intervention. If CBN last week said they sold so much, and this week too, they sold so much, you know there is limit that they can go. That limit depends on how much they have.”

Uwaleke added that closing the gap between the official and parallel markets might be an uphill task for the nation. In his view, the gap would persist as long as forex supply did not match demand.

He said: “You know, to access the PTA, it is not everybody that will have the patience to bring all this, bring all that, bring invoice etc. in order to meet the conditions to access the PTA. Some people will still go to the black market. Look at the conditions for accessing the Business Travelling Allowance (BTA), for instance, if you are going to be in the flight less than five hours, you are not qualified; if you want to travel, it has to be 14 days. So somebody that wants to travel and not within 14 days; somebody that wants to travel to a country that is not within five hours, these people will still need foreign exchange, and they won’t go to the official window to access it, it will still be black market. So at the end of the day, there would still be gap.But what the policy has done is that it has closed the gap. Before, the gap was around N200 and it was encouraging the arbitrage. What CBN has done now was to reduce the gap. But whether the gap will close completely is not possible.”

He explained that closing the gap could only happen if the CBN floated the currency completely like it was done in Egypt.

“And this is not the right time to do that because our foreign reserves are not up to the required threshold,” he said.  He opined that the nation’s reserves had to attain $32 billion to make the naira ripe for such initiative.

He stated: “A study by Tule et al (2015), which sought to determine an optimal forex reserves for Nigeria, established a minimum core foreign reserves level of US $32billion (being equivalent of 7.2 months of import).

“The International Monetary Fund ( IMF) recommends three months of import cover as a minimum benchmark for reserves.”

Recall that the reserves are just inching above $29 billion as of now.

As for Okafor, what is needed to be done to sustain the initiative was to create a very strong private sector driven by local production that would create jobs and export goods, and earn forex for the country.

“The challenge that I see is from supply side of forex.  And I sincerely hope that the CBN has thought through this new policy so that we don’t keep somersaulting with this policy.  I said this because, from what I have read in the past three to four months,our foreign reserves have been going up because oil price has gone up, and handling the issue of Niger Delta will increase oil export.It is going up, but are we earning enough to be able to take on the quantum of unmet needs in the country? This policy is silent on the banned 41 items, but I want to believe that there is no longer such policy since the commercial banks are now free to allocate forex to anybody they want to. My question is, has CBN quantified the needs for forex today and then match it up with supply side to be sure that it is going to be sustainable? If they have not, I believe that that is what they need to do, to be sure that it does not start and then it is discovered that it is not working again and we start looking for something else to do.

“I have read that banks should start to ensure that they provide funding for unfilled orders. I believe they have some kind of records or information based on what the banks have presented to them. But I want to say that whatever the bank has presented to them does not represent the unmet needs of manufacturers because, today, manufacturing is running at 50 per cent capacity utilisation of our factories. I have planned to be somewhere around 75 to 80 per cent and, of course, we already have mapped out the product we want to produce and how we want to get it across because the demand is there in the market. But because of the situation that we had in the country, we have now decided not to even bother with presenting our needs to the banks because they were not accepting. So if the CBN is looking at what the banks are presenting as the needs of the manufacturers, then they are making a big mistake because there is a lot of needs that we have not presented because the ones we presented were not attended to. But now that they have opened the door and asked people to bring whatever they need, they should expect some big demands coming from both the manufacturers and those who are into commerce. The question is are we ready to meet those needs?”