Forex shortage: A crisis foretold
Managing a commodity currency, anywhere in the world comes with the challenge of a terminal ailment. Just when one thinks there is a breather somewhere, it breakdowns and returns with the ferocity of a tiger.
Hence, several emerging economies are often in the ‘blues’ taming a currency crisis. And so is Nigeria, except that its cases are particularly more worrisome as the Central Bank of Nigeria (CBN), as Prof. Godwin Owoh, an economist, noted, seems to gamble more each time it throws a punch at what has become the economy’s most problematic enemy.
At the weekend, it did so again in a manner Owoh described as banal and naive. This time, it is offering the remittance market service users a bonus to wire money to Nigeria through the expensive official routes. The apex bank unveiled a new promotional campaign that would see recipients of diaspora remittances earn an extra N5 for each US dollar received. In a circular addressed to money deposit banks (MDBs), international money transfer operators (IMTOs) and the public, the regulator unveiled its ‘CBN Naira 4 Dollar Scheme’ to encourage more remitters to embrace the official window as against the more lucrative black market windows.
The memo read: “To sustain the encouraging increase in inflows of diaspora remittances into the country, CBN hereby announces the introduction of the ‘CBN Naira 4 Dollar Scheme’, an incentive for senders and recipients of international money transfers.
Accordingly, all recipients of diaspora remittances through CBN licensed IMTOs shall henceforth be paid N5 for every USD1 received as remittance inflow.
“In light of this, the CBN shall, through commercial banks, pay to remittance recipients the incentive of N5 for every USD1 remitted by the sender and collected by the designated beneficiary. This incentive is to be paid to recipients whether they choose to collect the USD as cash across the counter in a bank or transfer the same into their domiciliary account. In effect, a typical recipient of diaspora remittances will, at the point of collection, receive not only the USD sent from abroad but also the additional N5 per USD received.”
The promo, which is targeted at addressing the shock in the supply side, takes effect today. The CBN said commercial banks have been briefed on the implementation route. The new policy is not a flash in the pan in the efforts to make kings out of beneficiaries of diaspora remittances, which nosedived last year as COVID-19 took its toll on global jobs and personal incomes.
Towards the end of the year, the Bank rejigged the domiciliary account operation and remittance template, enabling recipients to collect money in the original currencies it was sent. Many, indeed, hailed the decision, which at least assuaged the resentment over the wide arbitrage the IMTOs have been accused of exploiting against the market.
“For the avoidance of doubt, the CBN further clarifies as follows: Only licensed IMTOs are permitted to carry on the business of facilitating diaspora remittances into Nigeria; all diaspora remittances must be received by beneficiaries in foreign currency only (cash and /or transfers to domiciliary accounts or recipients); IMTOs are not permitted, under any circumstances, to disburse diaspora remittances in naira (either in cash or by electronic transfers), be it through remittance settlement accounts (which had earlier been directed to be closed), third party accounts or via any other payment platforms within and/or around the Nigerian financial system,’’ the Bank said in one the series of engagements on the subject in December.
The CBN Governor, Godwin Emefiele, did accuse the IMTOs of doing nothing in terms of business development to deepen the market but continued to exploit the arbitrage, thus pushing the majority of Nigerians in the diaspora to the black market while fleecing the few individuals who opted for the legal option.
These regulatory efforts may have addressed the disincentive issue arising from the wide differential between the parallel market (where most retailers sell their dollars) and the official window, which currently stands at about N80 to a dollar. However, it says nothing about the high cost of remitting to Nigeria (like other Sub-Saharan African countries, which was estimated at 8.5 per cent in the third quarter of last year as against the 6.8 per cent global average.
It is not surprising that the CBN has seen the need to address market-related challenges to attract Nigerians in the Diaspora, which the Chief Economist of PwC Nigeria, Dr. Andrew Nevin, described as the country’s biggest export, into the official window. The black market is only one of the many competitions IMTOs face.
Technology has introduced its disruption as well. For instance, the digital currency has raised the competition. During #EndSARS protests last year, the international community in solidarity with the protesters donated via the virtual currency ecosystem. Thereafter, many fundraising campaigns have been successfully executed through the digital currency market, which many speculated could have partly informed the recent CBN’s order stopping banks from processing cryptocurrency transactions.
Remittances have remained a majo source of foreign exchange earnings for Nigeria.
But David Adonri, a financial analyst, said it is but one of the many important sources that need to be rejigged for efficiency.
In 2019, the inflow rose by 56.4 per cent to $17.57 billion, from $11.23 billion recorded the previous year. Ten years earlier (2010), the figure was $5.66 billion, showing that it grew by over 200 per cent in a decade. The data for 2020 are unavailable but an earlier forecast by the World Bank said the figures would dip globally significantly following the COVID-19 shock.
Also, capital importation tumbled by 60 per cent last year, falling from $24 billion recorded in 2019 to $9.7 billion just as the trade balance has been in the red in recent quarters. Since the fourth quarter of 2019, it has been negative. In the third quarter of 2020, it widened to N2.39 trillion when the total import value stood at N5.38 trillion as against N2.99 trillion injection from commodity export.
Despite the rally of crude prices, the reserve fell below $35 billion on March 3, 2020, the lowest in recent times. This puts enormous pressure on CBN’s ability to continue to defend the historically troubled naira.
Last year, the apex bank promised to continue to “pursue exchange rate unification” under the Nigerian Autonomous Foreign Exchange (NAFEX) window. Thereafter, The Guardian reported that the regulator was under intense political pressure to jettison the move.
Close to a year after the Bank made the promise, it continues to shillyshally on the exchange liberalisation option while bearing the burden of subsidizing the naira, which has been unable to shake off the chain of a commodity currency. It gains strength when crude is bullish and retreats in crisis time.
The recent fixation on the remittance seems to give the impression that the CBN sees the market as a priority solution to the currency crisis but economists have continued to balk at its sustainability.
“As good and/or ‘incentivizing’ as the policy appears, I am not convinced that it has the capacity to increase the inflow of foreign remittances. Without any doubt, a remittance is one of the major forex inflows in Nigeria. Before the recent CBN foreign exchange policy that mandates all the CBN licensed IMTOs to pay receiver/beneficiaries in foreign currency, remittances provided the platform for forex racketeering and illegal forex market in Nigeria,” Dr. Chiwuike Uba, a development economist, told The Guardian.
The economist said a more sustainable option is “a policy to improve our productivity and export capacity” noting that forex inflows from exports is a more sustainable approach to forex exchange stability.
Uba also noted: “The CBN needs to allow the convergence of the multiple exchange rate regimes by adopting a floating (flexible) exchange rate. The currently existing managed floating option has created more market frictions and distortions. The exchange rate market needs some certainty to jump-start and drive investments (domestic and foreign direct investments).”
As of last weekend, the naira traded at N406/$ at NAFEX as against the N480/$ black market rate. The Central Bank sells at N384/$ to bureaux de change (BDC) who are expected to give to end-users at an N2 margin. Interestingly, the government’s businesses are transacted at the CBN’s N380/$ official rates. Still, the apex bank offers forex at varied discounted rates to “special purpose” users.
The international development organisations, including the International Monetary Fund (IMF), have consistently warned that the existence of multiple rates would not promote a healthy investment market. Investment advisers said many investors who are waiting on the wings to bring in fresh capital as the COVID-19 crisis ebbs out would be deterred by the disincentive in the official market where they would be shortchanged.
The historical nexus of the naira movement charts and oil market seems to have foretold the current crisis like every other previous one the country has experienced since the 1980s. But the CBN appears helpless in the face of the daunting pressure, leaving the market vacillating, which does not support investors who need a predictable pattern to take a position.