CBN moving against ‘rentierism’ by Sam Ekpuk

Every economic cycle in Nigeria brings along a bouquet of rent-seeking activities that promote income earned from “gaming the system” and not traceable to any meaningful value conferred on society. In recent times, the subsidy regime on refined petroleum products, public power sector transactions and the era of multiple Foreign Currency (Fx) conversion rates have become intractable epitomes of rentier capitalism, defying various policy actions and leaving policymakers looking lame and out of options.

Last week’s ban by the Central Bank of Nigeria of dollar sales to the Bureau De Change operators as well as the suspension of all BDC licence application processing is the second move in as many months by the financial system regulator to rein in this bastion of rent collection and enforce a convergence of exchange rates (an IMF requirement for accessing $1.5 billion in support). The CBN directed all deposit money banks to designate teller points to render services normally rendered by the BDCs and declared its readiness to meet the Fx supply requirements of the economy. It accuses most BDC operators of money laundering and round-tripping (a term relating to sourcing Fx at official rates and supplying it to the black market at a profit, multiple times prescribed margins).

The ban was preceded by a CBN policy issued mid-May 2021 capping cash deposits into domiciliary accounts at $5,000 per bank customer monthly. The policy also contained restrictions regarding outward foreign currency transfers funded by cash lodgments and inter-account foreign currency transfers.

The combined effect of the above actions is a further deterioration (by over 27%) of the arbitrage margin between the official rate(s) and the parallel market rates. The BDCs have earned rent of over N300 billion between November 2020 and last week from this illicit margin. The operators and their allies claim that the CBN’s actions will result in the collapse of the BDCs and the loss of over 40,000 direct jobs linked to their operations. They also highlight that many persons with genuine transactions for which the CBN refuses to provide Fx for, will keep patronising the parallel market leading to increased rate pressures on that market which unfortunately serves as the marker for most economic transactions (even economic actors who source Fx at NAFEX rates turn around to sell their products based on replacement pricing linked to the parallel market rate). In the short term, this pro-BDC gang is likely to be “on point”. How short the term is will depend on the will and additional action by policy makers.

One would expect the CBN to request the relevant agencies to investigate and prosecute economic saboteurs among the BDC operators as a deterrent to criminal activities but I would focus here on the issues within the purview of the apex bank.

The naira has been in a free fall since the crash of oil prices between 2014 and early 2016. The CBN responded by denying importers of over 41 items access to official Fx supply. This led to some of this demand finding its way into the parallel market. The CBN also introduced the Importers and Exporters Wholesale Window in 2017 with some salutary effect on Fx inflows and market stability. Cuts in crude oil production quota, declining Foreign Direct Investment inflows due in part to insecurity across the country and lack of government policy clarity in several sectors, flight to safety by Foreign Portfolio Investors due to currency instability are among several factors that have further pressured Fx supply and rates. The CBN’s recent move to adopt NAFEX (a transparent pricing and settlement mechanism operated by FMDQ) for all official transactions has at least eliminated one opaque rate in the market. The CBN also introduced the Form Q regime granting Fx supply access to SME Importers (albeit with a reduction in documentation requirements) and reintroduced supply of Fx to the BDCs in 2020. These last two steps have become effective money laundering channels of late. Many DMBs afraid of losing their Fx trading licences due to sharp practices by some “emergency” SME importers in collaboration with bank employees have discouraged Form Q transactions, leaving many genuine users stranded.

In coming to grasp with what additional policy options exists for taming the challenge of multiple exchange rates, the CBN must first recognise and plug the source of Parallel Market Fx demand. Many actors claim the pressure is from accumulated and unserved official demand. I agree, but that does not paint the full picture.

A major source of Fx demand is illicit naira proceeds of corruption looking for a less diminishable store of value since real estate no longer holds that promise (it is estimated that over 6,000 empty luxury homes litter Abuja alone). As this class of politicians and their accomplices in and outside the public sector continue to plunder our commonwealth, they must seek ways of laundering and converting their naira reserves undetected. Dollar cash no longer holds that promise and many residential cash vaults hold more dollar cash than a lot of bank vaults. The CBN’s dollar cash lodgment restriction did not deter these actors and the BDC trade group (ABCON) has signalled that they remain undeterred. The next destination for most of these money laundering “greenback” seekers will naturally be commodity exports. Many will seek export contracts at any price (even accepting losses of 15-30%) in order to buy up primary goods locally and export in exchange for Fx inflows. This will place great short term inflationary pressure on agricultural products especially as production remains stunted due to insecurity in our food producing belts. Others will back illegal mining expeditions supported by militias paid for with their cash. This will further fuel insecurity. The upside would be increased Fx receipts, something our economy needs.

The CBN must therefore address three policy planks to further support Fx rate convergence and achieve a realistic value of the naira. The first is that it must transform from being a supplier to being a trader in the market. It should actively take positions in NAFEX aimed at signalling market direction. It needs to establish Fx trade lines with international financial institutions allowing her greater access to liquidity and trade volumes. This will smoothen the ebbs and flows from commodity export sales. Rates may deteriorate in the short term but if the recently introduced measures are diligently implemented we should begin to see an easing of rates and gradual convergence in under six months. In this same regard, it must scale up the capacity of the DMBs to effectively trade large volumes in NAFEX by increasing the size and duration of Fx open positions.

Secondly, in order to improve her Fx supply base (a requirement for active trading), the CBN needs to liberalise the capital importation regime and demonstrate to all actors that monies brought into the system the proper way are assured of remittances after necessary tax settlements have been accounted for. Linking Capital Importation and Export Proceeds to fiscal incentives enhances Fx supply in the medium to long term. Diaspora remittances incentives must go beyond the trading margins being offered. We can look to a few South West Asian economies to draw lessons on boosting remittances. Working in concert with the fiscal authorities, fiscal incentives for repatriation of export proceeds through official markets need to be ramped up. Every legitimate Fx need can and should be sourced from the official market. Petroleum marketers (the largest Fx consumers) should be assured of Fx supply but put through an independent supply volume certification regime to eliminate the abuse currently being propagated by various downstream sector actors. The key to converging rates and easing rate pressures is the elimination of supply shocks and the confidence of markets that all legitimate demand will be met. Unverified estimates show that close to 40% of our Fx demand is speculative (I am currently undertaking a research on the transmission effect of official Fx sales into our Port TEU/ cargo volumes and values). The supply guarantees will gradually eliminate the speculative behaviour.

Finally, we must criminalise the black market. Buying from or selling to the black market should be a basis for prosecution. PTAs, BTAs and all other in-country settlements should be disbursed using globally accepted stored value prepaid cards. A moratorium of 21 days for all holders of US dollar cash outside the banking system should be implemented thereby allowing all such holders to lodge their cash without fear of investigation in banks after which it will become criminal to undertake any exchange in foreign currency in Nigeria except through the banks. All BDC licences should be withdrawn and their deposits refunded. We must as a nation be resolute in blocking illicit flow of monies which gives rise to a plethora of socio-economic challenges including the insecurity we currently experience.

Ekpuk, CEO of Pierce Green Associates Limited and a development finance researcher, via or 08055003480 (WhatsApp only)


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