Foreign exchange conundrum and Cardoso’s antidote

The gravity of the challenge of foreign exchange (FX) was laid bare when the Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso announced that the new leadership of the apex bank inherited a $7 billion FX backlog.

What that meant was that some individuals and businesses had provided Naira equivalent of the said amount of FX and were waiting for the CBN to provide them the dollar to enable them repatriate their money, transact whatever foreign business or make payments for whatever reason.

This is certainly not the best of times to be a CBN Governor as the pressure has been mounting on Mr. Cardoso from various quarters to provide FX for payment of goods and services abroad.

The scarcity of FX has led to an unprecedented crash in the value of the Naira, Nigeria’s legal tender.

From an average Exchange Rate of N460.702/$1 in May last year (when the present administration came into office) the Naira depreciated to between N1, 470 – N1, 800. last week.

The CBN Governor has used every opportunity to engage in the public to assure that his team was undertaking a series of reforms to raise the value of the Naira, by working to make more FX available to those who genuinely need it.

It is public knowledge that Mr. Cardoso has been guest at the National Assembly on many occasions and most often than not, the discussions have centered mainly on what he and his team are doing to address the FX challenge.

Cardoso reforms

CBN has indeed undertaken several reforms to address the FX scarcity. Some of the latest policy measures were the decision to stop International Oil Companies from repatriating 100 percent of their earnings from the country immediately after receiving such revenue, which comes in dollars.

Under the policy, the CBN directed International Oil Companies to henceforth repatriate 50 percent of their revenue to Nigeria.

Until now, IOCs paid their FX earnings 100 percent directly to their parent companies through what is called Subsidiary pools, without the Nigerian FX market benefitting from their export proceeds.

However, under the new policy, the CBN said IOCs will no longer be allowed to remit 100% of their forex proceeds to their parent company abroad as soon as they are earned.

Instead, they will be allowed to repatriate only 50% of such proceeds immediately, while the other 50% must be repatriated to Nigeria and the amount held for at least 90 days in Nigeria from the day of inflow before being allowed to be taken out of the country.

The apex bank therefore directed, “banks to pool cash on behalf of IOCs, subject to a maximum of 50% of the repatriated export proceeds in the first instance, the balance of 50 % may be repatriated after 90 days from the date of inflow of the export proceeds.”

The CBN outlined documentation requirements to include: its approval for the repatriation of funds under the “Cash Pooling” transaction; a “Cash Pooling” agreement with the parent entity of the IOCs operating in Nigeria; Statement of Expenditure incurred in the period prior to the cash polling.

Others are: Evidence of the source of foreign exchange inflow; and Completion of relevant forex form(s) as required under extant regulations.

The CBN directed all banks to inform their customers and comply with the regulation.

It said that it remained committed to the promotion of transparency in Nigerian FX market and would continue to develop policies to stabilize and deepen the market.

The apex bank also stopped the payment of Business Travelling Allowance (BAT) and Personal Travelling Allowance (PAT) in cash.

It equally reversed the Dollar-for-Dollar policy and directed that International Money Transfer Operators would no longer pay dollars for remittances from Diaspora Nigerians.

Instead, remittances payout would be in Nigeria,

On the BTA/PTA, the bank directed that all allowances are henceforth to be obtained in cards.

A circular issued by Hassan Mahmud, Director of Trade and Exchange, referenced:

TED/FEB/PUB/FPC/001/006 and titled, “Allowable Channels for payout of Personal Travel Allowance and Business Travel Allowance” stopped Cash for such allowances.

It said that the new measure was part of efforts towards making sure that only genuine travelers obtained BTA and PTA, going forward.

The circular read in part, “Memorandum 8 of the Foreign Exchange Manual and the circular with reference: FMD/DIR/CIR/GEN/08/003 dated February 20, 2017stipulates the eligibility criteria for accessing Personal and Business Travel Allowances (PTA/BTA).

“In line with the bank’s commitment to ensure transparency 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 and credit cards.

“For the avoidance of doubt, payment of PTS/BTA by cash is no longer permitted.”

CBN assurances

Although the depreciation has largely continued, CBN has expressed optimism that the reforms it has implemented in the foreign exchange market would stabilise the market and improve the value of the Naira.

The Bank’s Deputy Governor, Economic Policy, Mr. Muhammad Abdullahi,

Early, this month, while declaring open the 2023 Economic Policy Directorate Retreat of the bank said that the gap was closing significantly between the different windows of the FX market.

A statement issued by the bank, quoted Mr. Abdullahi as saying that the FX has witnessed “massive reduction in the premium between the official rate and that at the Bureau De Change (BDC) segment.”

He noted that the premium between the BDC and the official rate had narrowed to 12.0 per cent in end-January 2024 from 61.93 per cent in January 2023, adding that the narrowing between the official and unofficial markets validated the impact of policy actions by the Bank, despite hedging and speculative activities.

To mitigate the challenges experienced in stabilising the foreign exchange market, he said the CBN harmonised the reporting requirements on foreign currency exposure of banks, and issued revised guidelines for International Money Transfer services in Nigeria to enhance ease of doing business for International Money Transfer Operators (IMTOs), boost remittance and other capital inflows, limit the outflow of foreign currency and illegal financial flows.

CBN alone can’t help Naira

One important lesson from Mr. Cardoso’s several engagements with members of the National Assembly is that the CBN alone cannot help the Naira. The task of providing dollars and stabilizing the Naira is far beyond the CBN, no matter how ingenious Mr.Cardoso and his team may be.

The CBN boss told the legislators that although the CBN has the official mandate to ensure a stable value of the Naira, the dwindling foreign exchange earnings by the nation and the increasing demand for foreign exchange by Nigerians for imports, school fees, medical bills and foreign travels must be addressed to have a stable foreign exchange market.

His words, “Put simply, the exchange rate is determined by the dynamics of supply and demand for a product or service. In essence, similar to the pricing of cows or cars, the value of the US Dollar in Nigeria is determined by the balance of US Dollars entering the country and the demand for US Dollars among Nigerians.

“Applying this demand and supply principle, let’s examine how the exchange rate has performed in recent years. The exchange rate in Nigeria has increased/depreciated due to the simultaneous occurrence of two factors: a decline in the supply of US Dollars coinciding with a surge in the demand for US Dollars.

Mr. Cardoso revealed that imports requiring dollars amounted to $16.65 billion in 1980 but that, “by 2014, the annual import expenditure had significantly surged to $67.05 billion, although it gradually decreased to $54.71 billion as of last year.

“Similarly, food imports escalated from $2.63 billion in 1980 to US$14.84 billion in 2019.”

He added that the number of Nigerian students abroad had grown astronomically.

Mr. Cardoso said, “In the 1980s and 1990s, the need for US Dollars for their living expenses was minimal. However, recent data shows a significant change.

“According to UNESCO’s Institute of Statistics, the number of Nigerian students abroad increased from less than 15,000 in 1998 to over 71,000 in 2015. By 2018, this figure had reached 96,702 students, as per the World Bank.

“Another report projects the number of Nigerian students studying abroad to exceed 100,000 by 2022.

“It also seems that the task of stabilizing the exchange rate, while an official mandate of the CBN, would necessitate efforts beyond the Bank itself and indeed to an attitudinal change of all our citizens.”

Piqued by the attitude of some Nigerians to import virtually everything they use in their homes, from food, clothing materials to toothpick, the last administration had listed 43 items, the importation of which it decided not to provide FX,

That administration also massively invested in backward integration in several sectors to enable Nigerians produce food and other commodities on which the nation has comparative advantage in their production, rather than import them and by so doing put more pressure on the FX market.

Although Mr. Cardoso and his team reversed this policy upon assumption of office, perhaps the CBN boss may have to review his decision with a view to strengthening those policies that can help local production of food and other goods.

As much as Mr. Cardoso may desire to provide FX for the Nigerian public, CBN cannot print dollars. If Nigeria does not export goods and services, the nation cannot earn dollars. Only deliberate policy actions can save the Naira. Both Monetary and Fiscal authorities must think outside the box and mobilise good spirited Nigerians to join in the battle to save the Naira.