Resuscitating the Value of Naira: CBN Lifts Embargo On Dollar Deposits, Stops Forex Sales to Bureau de Changes

After months of intensifying pressure from economic analysts, manufacturing concerns, small businesses, the International Monetary Fund (IMF) etc., the Central Bank of Nigeria (CBN) on Monday revised some of its foreign currency controls by removing its restriction on foreign currency cash deposits with commercial banks.

The CBN Governor said that members of the public can now resume transactions on their domiciliary accounts.  This means that bank customers can now begin depositing of foreign currencies in their accounts with their banks.

Due to the inability of the apex bank to cope with the enormous challenges and reduction of the external reserves, the bank has also withdrawn the sales of foreign exchange to Bureau De Change operators as a step to preserve the country’s external reserves.

The reserves which closed last year at $28.364 billion dropped to $28.193 billion according to the movement in reserves data available on CBN website as at 8th January, 2016. To date, it had lost about $3.8 billion since mid-last year when CBN announced a recovery of the reserves to $31.8 billion.

The CBN governor Godwin Emefiele, who made public the decisions of the bank on Monday in Abuja, said the Bureau de Change operators are however allowed to source for forex from any other source that will not be incompatible with money laundering laws.

Throwing more light on the reason for the hard-headed decision pointed with grave concern to the fact that Bureau de Change operators had abandoned the original objective leading to their formation, which was to serve retail end users who need $5,000 or less.

He said that, instead, the currency dealers have turn out to be wholesale dealers in foreign exchange to the tune of millions of dollars per transaction.

He said "They (BDCs) use fake documentations like passport numbers, bank verification numbers, boarding passes, and flight tickets to render weekly returns to the CBN."

The directive, however, led to a slump of the naira on the parallel market to N282 to the dollar yesterday, from N277 at the weekend.

Providing more insight into the decision of the central bank to end dollar cash sales to BDCs, he said: "In total disregard of the difficulties that the Bank is facing in meeting its mandate of 'maintaining the country's foreign exchange reserves to safeguard the value of the naira', we have continued to observe that stakeholders in some of the subsectors have not been helpful in this direction.

"Despite the fact that Nigeria is the only country in the world where the central bank sells dollars directly to BDCs, operators in this segment have not reciprocated the Bank's gesture to help maintain stability in the market.

"Whereas the Bank has continued to sell US dollars at about N197 per dollar to these operators, they have in turn become greedy in their sales to ordinary Nigerians, with selling rates of as high as N250 per dollar.

"Given this rent-seeking behaviour, it is not surprising that since the CBN began to sell foreign exchange to BDCs, the number of operators have risen from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licences every month."

The Governor said, rather than helping to achieve the primary objectives for which they were licensed, the central bank noted the following unpremeditated undesirable outcomes:

An avalanche of rent-seeking operators only interested in widening margins and profits from the foreign exchange market, notwithstanding of prevailing official and interbank rates; potential financing of unauthorised transactions with foreign exchange procured from the CBN; steady dollarisation of the Nigerian economy with attendant negative implications on the conduct of monetary policy and indirect sabotage of cashless policy initiative; and prevalent ownership of several BDCs by the same agent in order to illegally buy foreign currencies multiple times from the CBN.

Emphasizing the strain of the ruinous transactions activities of BDCs to Nigeria, Emefiele said "More disturbing, though, is the financial burden being placed on the Bank and our limited foreign exchange. The CBN sells $60,000 to each BDC per week. This amount translates to $167 million per week, and about $8.6 billion per year.

"In order to curtail this reserve depletion, we have reduced the amount of weekly sales to US$10,000 per BDC, which translates into US$28.4 million depletion of the foreign reserves per week and US$1.476 billion per annum.

"This is a huge haemorrhage on our scarce foreign exchange reserves, and cannot continue especially because we are also concerned that BDCs have become a conduit for illicit trade and financial flows," he said.

Justifying the forex curbs announced by the CBN, the governor noted that Nigeria has been dealing with the effects of three serious and simultaneous global shocks, which began around the third quarter of 2014.

These according to him are the over 70 per cent drop in the price of crude oil, which contributes the largest share of Nigeria's foreign exchange reserves; geopolitical tensions along critical trading routes in the world including between Russia and western powers, Saudi Arabia and Iran, etc; and normalisation of the monetary policy by the United States Federal Reserve Bank.

"In the aftermath of these shocks, growth in the global economy in the first two quarters of 2015 was less than envisaged, thereby leading to a weak outlook for the rest of the year.

"Indeed, estimates of global growth for 2015 have been revised from almost four per cent to 3.1 per cent. The challenges of these global developments are having lopsided effects in many emerging and developing countries.

"Within this context, and especially when juxtaposed with comparable countries, the Nigerian economy remains moderately robust. Nonetheless, these strong global headwinds are impacting the domestic economy considerably.

"In 2015, GDP growth decelerated from 3.9 per cent in the first quarter to 2.4 per cent in the second quarter. However, it has increased slightly to 2.8 per cent in the third quarter," he explained.

Having risen marginally from 9.3 per cent in October to 9.4 per cent in November 2015, the CBN governor added that headline inflation had remained at single digit, staying slightly above the central bank's tolerance range of 6-9 per cent.

A breakdown of the inflation dynamics, he said, indicated that the underlying pressure derives largely from the lingering base effects of unfavourable energy prices and exchange rate pass-through, which may have been worsened by postponed benefit.

Furthermore, the CBN governor explained that following the drop in crude prices from a peak of $114 barrel in July 2014 to as low as US$33/barrel in January 2016, the country's reserves have suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the forex market.

The fall in oil prices, according to him, also implied that the CBN's monthly foreign earnings had fallen from as high as $3.2 billion to current levels of as low as $1 billion.

"Yet, the demand for foreign exchange by mostly domestic importers has risen significantly." He stressed.

He added: "For example, the last time we had oil prices at about $50 per barrel for an extended period of time was in 2005. At that time, our average import bill was N148.3 million per month. In stark contrast, our average import bill for the first nine months of 2015 is N917.6 billion per month, even though oil prices are now less than $35 per barrel.

"The net effect of these combined forces unfortunately is the depletion of our foreign exchange reserves. As of June 2014, the stock of foreign exchange reserves stood at about $37.3 billion but has declined to around $28.0 billion as of today."

In order to avoid further reduction of reserves, he said the CBN took a number of counter reactive actions including the prioritizing of the most critical needs for foreign exchange.

In this regard, the central bank's highly limited the supply of foreign exchange for matured letters of credit from commercial banks; for importation of critical raw materials,  for the importation of petroleum products; plants, and equipment, and payments for school fees, BTA, PTA, and related expenses, became priorities.

As such, he said under the prevailing circumstance, it would be difficult to meet expectations for shopping needs abroad.

According to him, the sum of $100 million representing an average of $500 million weekly is required to cater for the forex needs of shoppers abroad.

He explained that since the CBN didn't ask the banks to place the ban on the use of their debit cards abroad, the removal of such restrictions would also have to come from the banks.

In his last statements, the CBN Governor appealed to Nigerians to show understanding at this difficult time, adding that the measures so far taken were not intended to be punitive on anyone or group.