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By Chinwendu Obienyi
The recent reforms by the Central Bank of Nigeria (CBN) aimed at addressing issues in the foreign exchange (FX) market have sparked mixed reactions and raised concerns about their effectiveness amidst Nigeria’s weak macroeconomic space.
The apex bank, last week, rolled out three new circulars, all of which focused on checking potential infractions on the demand side of forex.
For instance, in the first circular titled “Allowable channels for payout of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA)”, the CBN directed all authorised dealer banks to restrict PTA/BTA payout to electronic channels only, including debit and credit cards.
“In line with the bank’s commitment to ensure transparency and stability in the foreign exchange market and avoid foreign exchange malpractices, All Authorized Dealer Banks shall henceforth effect payout of PTA/BTA through electronic channels only, including debit or credit cards,” the circular stated.
The CBN also urged all authorised dealers and the public to adhere to this directive promptly to facilitate a seamless transition to electronic payouts.
In the second circular, the CBN revised upward, the allowable limit of price deviation for exports and imports to -15.0 per cent and +15.0 per cent of global average prices respectively from -2.5 per cent and +2.5 per cent previously, citing global inflation dynamics and other related challenges as reasons for the review.
Lastly, the CBN directed banks to limit cash pooling on behalf of IOCs (that is, the transferring of offshore funds to parent accounts) to a maximum of 50.0 per cent of the repatriated export proceeds in the first instance, and the remaining 50.0 per cent after 90 days from the date of inflow of export proceeds subject to the fulfilment of all documentation requirements.
In a circular issued to all authorized dealer banks tagged; Requirements for Foreign Currency Cash Pooling On Behalf of IOCs in Nigeria, signed by the Director, Trade and Exchange Department, CBN, Dr Hassan Mahmud, the apex bank stated that it has observed that the proceeds of crude oil exports are transferred offshore to fund parents account of IOCs, which has led to the impact in the liquidity in the domestic foreign exchange market.
The CBN stated that while it strongly supports the need for IOCs to have easy access to their export proceeds to meet their offshore obligations, this must be done with minimal negative impact on liquidity in the domestic foreign exchange market.
It further added that this is subject to the fulfillment of the following documentation requirements. “Prior approval of the CBN for repatriation of funds under the “cash pooling” transaction, cash pooling agreement with the parent entity of the IOCs operating in Nigeria and statement of expenditure incurred by the IOC in the immediate past period relating to the cash pooling”.
Others include, evidence of the source of FX inflows and completion of relevant forex forms as required under extant regulations.
Reacting to the circulars, some economic analysts who spoke to Daily Sun via emailed notes, stated that although the CBN is doing all it can to fix the nation’s FX crisis, similar reform energy is needed from the fiscal side to drive that much needed change. Others simply stated that the CBN needs to find out the productive side of FX in the country.
The Managing Director, Afrinvest Research, Abiodun Keripe, maintained that a lasting solution to Nigeria’s FX crisis would require similar reform energy from the fiscal side, especially as it pertains to fixing FX supply side problems, blocking of the mass leakages in key government establishments and alleged FX speculation practices by some arms of the executives.
“As per our view on the circulars released, we believe the restriction of PTA/BTA payout to electronic channels would help curtail FX round-tripping activities in that segment. Also, we posit that the upward review of the ceiling on price deviation for exports and imports should favour Nigeria’s exporters in competing markets, given that bilateral trades (even among developed markets) are increasingly driven by pricing incentives.
“On the circular limiting the allowable cash pooling on behalf of IOCs, though we are oblivious of whether the CBN conducted stakeholders engagement before taking the action, we think that the good intention of the policy may snowball into declining investment flows into the oil & gas sector should mutual understanding be lacking between the CBN and the IOCs on the policy goals”, Keripe explained.
In his intervention, the Co-founder BudgIT, Oluseun Onigbinde, noted that the devaluation of the currency and subsequent inflationary pressures have created significant economic challenges.
According to him, the government’s decision to remove subsidies and float the currency was hasty and lacking in comprehensive analysis which has resulted in negative consequences due to insufficient reserves to support the floating currency.
“You do not bring down a fence without understanding while it is standing in the first place. You also do not float a currency when you do not have reserves to back it, hence we are suffering from the consequences of those decisions”, Onigbinde said.
Offering some suggestions, he suggested the need for a significant emergency fund (potentially $5-$10 billion) to stimulate the market for a limited period, alongside optimizing oil production and ensuring proper remittance of oil sales.
He also emphasized the importance of fiscal discipline to avoid wasteful spending. He said, “Fiscal tightening also has to come into play here because there is no point in taking a $10 billion loan or getting the money from oil sales and keep feeding an appetite that is unproductive. Is the money we give to state governments properly monitored or if a significant chunk of those monies are not round-tripped back to the parallel markets? This is where the Finance Ministry has to come in because the CBN can do everything right or wrong but the fiscal side has to complement it.
We also have to look at the monetary policy, the CBN is acting as if it has an infinite supply of dollars and leaving market forces to determine the price and I know that they know that there are infractions in the market and hence the reason for these circulars but your monetary and exchange rate policy needs some sort of brakes. This is a time when the CBN needs to know the productive use of FX across sectors in Nigeria, implement a transparent pricing mechanism and re-evaluate its policies to address market inefficiencies”.
