My proposed solution to our foreign exchange crisis, if followed will solve the following of our problems
-It will restore and stabilise the naira and bring our economy out of recession
-Will make the black market redundant
-Will prevent corrupt official from siphoning public funds out of the country
-Will reduce all the inefficient bureaucracy associated with making transaction in foreign currency.
-Will increase accountability and transparency
-Will boost local production and employment,
-will conserve our external reserve
All these are exciting prospect, almost all Nigerian would want these.
The very first step to addressing Nigeria’s economic crisis starts with asking a very personal but fundamental question. Is it a necessity to own a domiciliary account to be able to make international transactions? The answer is a big no. If the CBN could help Nigerians make international transaction with their naira accounts will it satisfy those who by all means support the ownership of domiciliary account for international transactions? I have contemplated on why the government (judiciary) would want ordinary Nigerians to owe domiciliary accounts in the first place but could not see any tangible reason. It is not a fundamental human right.
The only good thing about private domiciliary accounts ownership is that the CBN is totally removed from participating in the corruption that accompanied such laws by transferring it to the commercial banks. The Central Bank of Nigeria through commercial Banks could easily provide the services a domiciliary account provides with a naira accounts and as a result eliminating all the corruption, inefficiency, hoarding of dollars, and not to mention the negative impact of forex speculations by domiciliary accounts holder which is a major headache to CBN because of the pressures it also exerts on naira.
We should all know that there is a law backing domiciliary account ownship in Nigeria. And this law, together with CBN policy of cash forex sales are the only drivers of our current recession. All Nigerians are entitled to know the implications of laws made in Nigeria, especially laws that authorised banks to open domiciliary account for individuals, companies and organisations. According to chapter f34, paragraph 17, section 1 of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995, individual are not only permit to open domiciliary account but also allowed to buy or sought their forex as they wish in cash and amazingly are by law not required to disclose their sources of forexes. I honestly coud not believe my eyes when I was reading the provisions of this law. This is not leadership, this is carelessness, and a blantant show of irresponsibility and the subjection of Nigerians to a great unnecessary pain and suffering.
A careful look at this law and CBN’s Foreign Exchange Policies one will realise how porous and reckless the system is. It seems its a deliberate set up to encourage corruption and acts as an avenue to siphon public funds in hard currency. This is because no one in his/her right mind would advocated the Wholesale Dutch Auction system (WDAS) of forex market where dealer buys forex direct from the central bank in cash, coupled with individuals access to privately owned domiciliary account. While Nigerians might be happy that we as individuals have the rights to domiciliary account and forexes, corrupted individuals are using the backdoor of domiciliary account ownership to siphon and launder stolen funds in hard currency out of the country and/or stored in their private homes. The CBN governor Mr. Godwin Emefiele when asked by ThisDay news in an interview how much dollars is in private individuals domiciliary account he said about $1billion. That was in April last year.
By March this year it grew to over $20 billion. Remember this is not electronic money, but cash dollars. And where did individuals get this dollars from? Of coures, from the same dollars the CBN has been injecting into the economy in an effort to stabilise the naira. While CBN is busy doling out forex to help the economy, Stolen funds could and is being used to acquire these forexes and stashed away in domiciliary accounts and in places beyond reach of CBN thereby reducing its ability to properly affect variables targeted in its policies. On the one hand I laud and applaud the bank and its MPC (Monetary policy committee) encouraging Nigerians to go cashless, but ulterly confused on the forex front where the bank is busy doling out forexes in cash to dealers and BDCs.
This gives incentive to laundering stolen public funds by making forexes readilly available. We are already enudated by recents unending arrests made my EFCC and SSS and the amount of recovered “Cash” forexes stashed away in private homes running into several hundreds of millions. Even the state governments seems to be hoarding forexes. The most recent case points to invasion of government house in Akwa Ibom where stockpiles of dollars was found lock away in a room. These are the ones we know about, we dont know about the ones we dont know about. If foreign exchange is meant to facilitate economic transactions what are they doing in private homes?
The ultimate question is, why does the bank and government allow cash forex to be traded like a commodity inside Nigeria knowing fully well the corruption that comes with it, that we don’t have the institutional capacity to enforce the rules and regulations of such systems, and that we will never be able to adequately supply it? This is bad economics. We should remember that in other to stabilise Naira, we should not create demand for forex more than is needed. But by allowing all Nigerians access to domiciliary account and dealers the rights to buy forexes in cash from the bank, the bank has broadened the demand base of forex which will add to the presure and further depreciate the Naira which is not good for the economy. Also remember that the main and only objective of foreign exchange is to provide forex for economic activities only, but creating demands for forex beyond what is required for Nigerians to pursue economic activities depreciates the Naira and has propelled the economy into recession.
My advice to solve the current crises and achieve the above, lifting Nigeria out of recession starts with repealing those laws, going cashless with forexes, and closing all domiciliary account in the country. The Central Bank and the government should as a measure of safeguarding the total collapse of the naira and dollarization of the economy revoke all rights of individual to own domiciliary account and the right of commercial banks to keep forexes. And streamline all incoming forexes, especially remittance to the bank only. This is the only way out to stabilise the naira in the short, medium and long run. I know some would say that I have gone mad to suggest such drastic measure, but I crave your indulgence and plead with you to read a little further to understand why I would advise on such measure. Has anyone contemplated on why we would need a domiciliary account; other than to be able to make payment abroad, what other legal reasons?
I know you would say “to also receive payment from abroad”, and then what? You would either withdraw cash and head to the black market because of higher rates or you can exchange it in the bank for naira. If you decided to withdraw cash to change in the black market, you are merely sending the dollar intervention from the CBN to the black market, the bank knows this. On the side of black market, the bank has no influence nor policies on what is permissible, it has nothing on black market. Just imagine sacks full of stolen public funds (naira ) from corrupt individuals, government workers and politicians waiting to whisk any forex they could get their hands on and stack away in private homes away from the reach of CBN. The evil in this is that laws surrounding forex is such that makes it easier for corrupt officials to acquire it but prevents and makes it a lot harder for genuine importers who need to make payment for raw materials purchased abroad to feed local production to acquire it.
Or if they could it will be at a higher rate and higher cost. Higher cost that would now be transferred to Nigerians. Why would CBN sale forex to the banks and BDC at an extremely low price and expect the Nigerians to buy it a much higher price from them. This system the CBN is using to manage foreign exchange and economy is synonymous to feeding a dog in the midst of wolves. Of course the wolves will feed on the dog and its meal. Just throwing cash forex into the economy is the most reckless policy I have ever seen. The most astonishing is that the CBN keeps flooding the economy with billions of dollars but keeps wondering why the forex situation is not easing up. With limited and very low foreign reserves, even now that oil price has dropped, how can the CBN feed our importers, manufacturing sectors, and at same time feed corruption. And given the amount of stolen funds that was discovered by this present administration I can tell that we are dealing with almost near unlimited amount of stolen public funds waiting to buy off these forex intervention at any price.
That’s why our foreign reserve is depleting so fast. Nigerians are now storing value in our local banks using foreign currencies to the point that our banks are saturated with forexes. We can all remember that some time last year the banks refuse forex deposit by domiciliary account holders. The banks refused taking in dollars because their Vaults are filled up with forexes. You can imagine the enormity of the cash forex in our banking system. This amount can rival the total naira in circulation. These monies are just sitted in banks Vaults doing nothing, serving no economic purpose. And yet they said we have shortage of forex. So I call on all Nigerians to rise up and pressure the government to repeal the Foreign Exchange (Monitoring and Miscellaoneous Provisions) Act 1995. Especially chapter f34, paragraph 17, section 1. This sections blatantly legalises corruption, and together with CBN foreign exchange policies is responsible for our economic recession.
After repealing these laws, the apex bank can and should start the use of naira accounts to make international transactions so Nigerians would have no need for a domiciliary account in the first place. This is the most efficient and responsible way forward because we are trying to do away with cash forexes by keeping it offshore . The CBN should make provisions and enlarge its duties to include making international payment from naira accounts. In other words, all international payments must go through it.
There will be no need to inject all those billions of dollars it has been injecting into the economy to stabilise the naira. The bank can use this forex to settle bills on the international front from naira transactions by Nigerians. In other words Nigerians should be able to walk into commercial banks and conduct international transaction using their naira accounts. I suppose we are all aware that the black market only thrives with cash forexes, therefore going cashless with forexes will not only render parallel market redundant, it will reduce all the inefficient bureaucracy associated with making transaction in foreign currency, it will take speculators out of business, block the avenues in commercial banks through which stolen funds are laundered out of the country.
And there will be just a single rate of exchange, that means no black market rate, no inter-bank rate, no wDAS/rDAS rate. There is going to be just one single rate at which each forex in the country is exchanged. This is the most responsible and civilised way. This will improved accountability and transparency and provide the apex bank with more information to adequately clamped down on illicit transactions because with time the CBN will have enough data to form a trajectory of foreign expenditures. And a deviation from usual transactions could easily be detected and identify. This will put the CBN on the forefront for the fight against money laundering and corruption it has always preached.
Of course there is concern regarding this method which I shall address. And the concern boils down to the depletion of our foreign reserve. All Nigerians acknowledge and respect this concern but how far has the bank gone in safe guarding of our reserves? According to the data from the CBN database, In 2008 our reserves stood at about $64.2billion, today 1st Nov. 2016 it is about $23billion and declining. The most astonishing is that no one has ever seen a situation where a country reserves falls concurrently with surplus trade balances. Nigeria’s trade balances has always been in surplus. According to NBS, in 2008 our export was #9.6trillion, import was #3.3trillion, giving a surplus of #6.3trillion. In 2009 our export was #7.4trillion, import #5trillion, surplus #2.4trillion. In 2010 our export was #13trillion, import #6.6trillion, surplus #6.4trillion. In 2011 our export was #19trillion, import #10trillion, surplus #9trillion. In 2012 our export was #22.4trillion, import #5.6trillion, surplus #16.8trillion. In 2013 our export was #14.2trillion, import #7trillion, surplus of #7.2trillion. In 2014 export was #17.2trillion, import #7.2trillion surplus #10trillion. In 2015 our export was #9.6trillion, import #6.7trillion, surplus #2.9trillion. From the above data you can see that our reserves continues to fall despite trade surpluses.
To put this in perspective, think of a family that earns more than it spends, and yet its savings keeps depleting. You can see clearly that Nigerians has earn so much surpluses to be having this headache of recession. We earn more dollars than we spend, and as a result our reserves should rather be on the increase. That means we should expect to see a positive linear progression in reserves acquisition accompanying consistent trade surpluses. But yet our reserves keeps depleting and as a result I find it very important that Nigerians know why this is so. There are two reasons our reserves keeps depleting regardless of trade surpluses.
The first is because our government decided to create more demands for dollars beyond what the economy needs through domiciliary account ownership which also created a backdoor for acquiring cash forex which are then transfer out of the country through commercial banks or are stored in private homes by corrupt officials. The second is as a result of CBN policy of cash forex sales to dealers and BDCs. It takes the two. Because without CBN feeding the system, domiciliary account ownership will be useless. CBN should please stop blaming it on the drop in global oil prices. From the data above, if we should add all the surpluses from 2008 to 2015 we would have #61 trillion. Using the CBN’s wDAS/rDAS average exchange rate (2008-2015) of $155 , #61trillion will give us $393.5billion worth of surpluses. Where has all the surpluses gone? That should be a questions that needs answers to. But I will not try and answer that because that will require looking too much into the dark, and we all know that in Nigeria when anyone looks too much into the dark something will start looking back. Or better, the question should be directed to the CBN.
If we actually paid attention to the data above and my reasoning we could see that closing our domiciliary accounts is the fastest way of getting us out of this recession. We currently have over $20billion dollars sitting idle in our commercial banks. I can go out on a limb here to say that most of this monies now belongs to the commercial banks and not the original depositors, this is because the original depositors have already transferred it out of the country leaving the physical cash in Nigeria as a liability to the banks. Closing our domiciliary accounts does not mean account holders or the banks will lose their monies. The same medium employed by the CBN that let individuals acquire these monies, the same measure could also be use to get it back. Then the enormous pressure on naira exacted by the need to own and operate a domiciliary account will be no more thus leaving only the pressure from the real sector and other economic activities, which is how it should be. Even in the real sector, given our balance of trade surpluses there shouldn’t be overbearing pressure on the naira. This is the only way because from the rate at which the CBN is doling out forexes from our reserve we have less than twelve months before we completely run out of reserves. I am very concern about this and every Nigerians should.
This system of monetary policy with regards to foreign exchange management that I am proposing will not impact negatively on our reserves, on the contrary given our history of surpluses, it will directly and/or indirectly build our reserves. Even if we don’t consistently have surpluses, it would still not impact our reserves adversely. We have other avenues to acquire forexes to build our reserves such as remittance and foreign direct investments. Of these two, remittance is the most prominent.
From World Bank’s estimates Nigeria received over $20billion in remittance in 2015. By the end of 2016 the value is estimated at $35billion and in 2017 over $40billion. You can see from our previous data that sometimes remittance alone can fund and provides forexes of between 70%-100% of our importations. the CBN should not impede but negotiate reasonably with money transfer agencies like the Western Union, Money Gram, World Remit, and Rai money transfer in a way that on the international front the forexes from all these transfers goes to the CBN only and not the commercial banks. And on the local front the CBN provide the naira for the local use of these money transfer agencies. The dollars should then be used for international payment of naira transactions by Nigerians. By these the bank is creating a strong mutually reinforcing two way system of naira to dollars and dollar to naira systems of foreign exchange management that will stabilise the naira in the short and long run.
The only hiccup is that a sizable portion of this remittance goes to unlicensed lnternational Money Transfer Operators (IMTO) based outside Nigeria. These are mostly small scale businesses by Nigerians in diaspora to assist other Nigerians send money home. As a result, Nigeria is denied access to most of the remittance. The questions now is how to regain back this portion. I would advise that any approach taken should be a humbled one because these operators are, firstly outside the boundaries of this country and secondly, since Nigeria can’t make laws that cut across its geographical boundaries, they are not necessarily breaking any specific law. Nigerians in diaspora patronise the unlicensed IMTOs more because their exchange rates are same with the parallel forex market in Nigeria.
This rate is far higher than the CBN’s, BDC’s, and inter bank rates or any other official money transfer agencies like the Western Union, Money Gram etc. It is normal economic behaviour to perpetual one’s economic interest first. In this very case, not even patriotism can make them do otherwise. But if we follow my advice above by going cashless on forex and making CBN the only dealer in forex. Parallel market will become redundant and we will have just one rate of foreign exchange to a forex. The idea here is to make all money transfer operator’s rates to be almost one, so that there will be no incentive for Nigerians in diaspora to patronise the unlicensed IMTOs. In addition we can create policies that will incorporate these unlicensed IMTOs into our official system and create a means in which the CBN gets their forex and provide the naira equivalent here in Nigeria to them. After all, most of them are genuinely small businesses that operate within the laws of their host nations and by no means breaking any laws.
In conclusion I will like to reiterate the message of this article to make sure it is clear:
The CNB should Stop doling out forexes in cash and go cashless. We should repeal the porous, reckless and fraudulent Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995. Close all domiciliary accounts, but provide avenue through which naira accounts could be used to settled genuine foreign transactions and finally revoke the rights of commercial banks to keep and make transactions inside Nigeria in forexes. Not until we do these our naira will never stabilise and as a result we run a real risk of wide scale destabilisation of our economy by this avoidable recession.
In my next article am going to talk about how monetary policies can complement the fiscal policies to improve the forex situation further through increased aggregate production, higher employment and inflation control. Especially in youth employment, as I have just currently passed out of NYSC am going to join the queue of the unemployed. In this edition I will make my case for rapid expenditure And expansionary fiscal stimulus to boost the economy. I see great potential in what Nigeria can do and become. Stay tuned.
By Anthony Weli