Bureaux de change and the economy

The Association of Bureaux de change (BDCs) Operators of Nigeria (ABUCON) called its 3,500 CBN-licensed members to an emergency meeting the other day and complained about low transaction margin as it revealed that BDCs buy forex from the Central Bank of Nigeria, CBN, at N358/$1 but are required to sell at N360/$1. ABUCON bemoaned challenges such as losing many forex users, who choose to obtain personal and business travel allowances, medical bills and school fees payment abroad through banks or, where they prefer non-documentation, through the parallel forex market. The association then claimed that BDC operators were incurring losses and “may go underground unless CBN listens to their demands.” It is unclear if that was a threat for members to swell the ranks of parallel forex market speculators.

Presenting what seemed to be a set of options rather than take-all or leave-it package, ABUCON demanded from the CBN among other things (a) reduction of BDC forex buying rate to N350/$1 together with the selling rate of N355/$1; (b) fixing of BDC commission at 3.5 per cent of transaction volume; (c) the same forex selling rate to banks and BDCs; and (d) access of BDCs to increased sources of forex by purchasing export proceeds. ABUCON urged members to install necessary equipment in order to directly access dollar funds from International Money Transfer Service Operators (IMTSO). Justifying its demands on grounds that BDCs contribute to reduction of the national unemployment rate, the association pledged to transparently support the apex bank’s monetary and exchange rate policies in cognisance of their being aimed at national economic development.

ABUCON’s quest for increased export proceeds ranklingly falls in the shadows of rising crude oil prices with the so-called CBN’s external reserves climbing above $40 billion. That mark was last witnessed four years ago. And the conjuncture brings back memories of betrayal of the national interest. Remember that in 2006, Nigeria paid $12 billion ransom for total extinguishment of the London and Paris club external debt trap. But the extortive creditor countries additionally commissioned the IMF to administer two toxic extraneous conditionalities, namely, adoption by CBN of the wholesale Dutch auction system in February and disbursement of portions of the external reserves directly to BDCs from April of that year. The Olusegun Obasanjo administration then was not bound to accept the injurious measures nor should its successors retain them. While the purported expectation of the measures was to forge a unified and stable exchange rate, their real objective was to dissipate the mounting receipts from then rising oil prices.

Ten years later, after the external reserves dropped to under $40 billion, the CBN in January 2016 came up with self-indicting disclosures. Firstly, the apex bank affirmed that Nigeria was the only country in the world where the central bank sold part of the external reserves directly to BDCs. Though the apex bank announced discontinuation of the practice, the fact that BDCs currently purchased forex from CBN at N358/$1 evidences subsequent return to the unconventional practice. Worse still, with effect from 9/8/16, CBN granted each BDC approval to buy through its preferred deposit money bank on a weekly basis up to a maximum of $30,000 cash from accruals of inwards money remittances from Nigerians in the Diaspora via IMTSO. Thus in one year, the 3,500 BDCs may access $5.4 billion worth of the country’s invisible export proceeds already captured in the banking system. Again Nigeria is the only country in the world where invisible export earnings in the banking system are sold to BDCs. The practice amounts to throwing away sorely needed scarce resources for national development to the advantage of foreign economies. The practice should therefore stop. As for the ABUCON demand for what essentially amounts to unlimited access to the country’s merchandise and invisible export proceeds, it is a national insult for which Nigerians rendered poor by such mismanagement of the country’s commonwealth deserve an apology.

Secondly, CBN stated that direct funding of BDCs depleted external reserves. However, the approval for banks to fund BDCs with private sector invisible export earnings exposes the wrong and narrow view that external reserves should only be derived from public sector export receipts. As a matter of fact, foreign earnings by all economic sectors and individuals of the country provide the source of the country’s external reserves just as they jointly should advance the national economy.

Thirdly, the CBN pointed to persistent unstable and segmented widely diverging exchange rates with BDCs, depending on the level of greed which the apex bank did nothing to check, charging margins of 25 per cent and upward above the “official” exchange rate. The CBN attributed to BDCs negative economic activities such as dollarisation, multiple currency practices, financing of smuggling which undermines domestic production thereby fuelling rapidly growing (instead of reducing) unemployment as well as facilitating the stashing of forex obtained from CBN and the banks in local and foreign private bank accounts.

Most sadly, dissipation of the country’s ample foreign exchange accruals in purported search for abuse-free and stable and unified exchange rate has turned out to be a planned long-term wild-goose chase because the apex bank with the active connivance of the fiscal authorities has steadfastly refused to correctly implement the managed float exchange rate fixing stem meant to be in operation. It is contained in the Medium Term Expenditure Framework/Fiscal Strategy Paper and the Economic Recovery and Growth Plan that the CBN fixes (certainly in consultation with the fiscal authority) the rate that the National Assembly adopts as the Appropriation Act exchange rate (AAR). In a planned mixed economy, it is the responsibility of the Ministry of Budget and National Planning in collaboration with CBN to engineer foreign exchange demand relative to supply so that the exchange rate fluctuates within the stable band of AAR+/-3 per cent requirement implicit in the first principal object of the CBN as contained in its enabling law.

In practice, foreign exchange should flow directly from holders to specified genuine economic end-users through intermediating banks which should earn a commission for brokered transactions. There is no room for middleman foreign exchange dealer banks (which in any case do not generate the money being transacted). Even the CBN does not directly generate significant amounts of forex: the apex bank is forex custodian, pure and simple. Forex purchased by genuine end-users for any settlement (which is usually at future date) should be kept in a pipeline (holding) account domiciled in the CBN for seamless release on maturity date to foreign beneficiaries. Any surplus (whether or not engineered) forex should be pooled in the CBN as Nigeria-owned external reserves.

However, under the long-running extant faulty procedure where CBN turns its back on the AAR that it dictated and begins to sell withheld Federation Account dollar allocations to banks and BDCs to hold (even if momentarily) at rates outside the noted stability band, the apex bank not only unilaterally and illegally devalues the naira but also engages in currency trading and speculation thereby purposely fomenting macroeconomic instability to the detriment of efficient economic performance. Both deliberate missteps are breaches duly prohibited by the CBN Act 2007. The National Assembly should, therefore, put an end to the breaches and restore the economy to good health.

The CBN, as far back as August 2007, conceded that the country’s foreign exchange was not being managed aright. The position has not changed. But correct implementation of the managed float system by way of a single forex market based on total public and private sector merchandise and invisible export accruals pitted against well-specified import needs will produce enormous benefits. The fake national domestic debt will cease growing and become amenable to replacement. Government revenue will experience tremendous surge from the inclusion of receipts derivable from forex access tax (this revenue source is currently being fraudulently milked by interlopers wrongfully erected by the CBN). A conducive economic environment will set in, leading to rapid development of best standard of educational, medical and all types of infrastructure, the lack of which constitutes the pretext for banks and BDCs to fritter away scarce national resources. Finally, BDCs will revert to their traditional role of specialising in small-scale private forex transactions involving tourists and transient visitors at exchange rates firmly tied to the ruling AAR as in focused economies.The fiscal and monetary authorities should know by now that a central bank ought not to willfully under-develop the economy as the Central Bank of Nigeria seems to have done over time.