THE sharp fall in oil prices and low foreign exchange reserves have put the Central Bank’s foreign exchange management under great strain and made hard and tough choices inevitable. The apex bank which gets 90 per cent of its foreign exchange from the proceeds of crude oil sales, has seen a 70 per cent decline in oil prices from a high of $116 per barrel in June 2014 to $33 per barrel in January 2016. When oil prices were high, the CBN was raking in about $3.2 billion inflow every month in foreign exchange, an amount that was sufficient to meet the country’s foreign exchange demand. Today, with the drastic fall in crude oil prices, what the bank gets is a meagre $1 billion monthly, an amount that is grossly insufficient considering our high import bill estimated at about N920 billion per month and several other foreign exchange commitments.
As at June 2014, the nation’s external reserves stood at $37 billion; today, we have just $28 billion in our foreign reserves. The $9 billion dollars fall represents about 25% decline in just 18 months. In the first trading week of 2016 alone, our foreign reserves declined by about $170 million. With escalating import bills, rising number of overseas education commitment by hundreds of thousands of Nigerian youths, attractions of medical tourism and other fancy expenditures that appeal to millions of Nigerians, there is no guarantee that we shall not be hitting the rock bottom in our forex vaults before the end of the year unless tough and proactive measures are taken.
Mr. Godwin Emefiele, the Central Bank Governor has since the onset of the oil price fall in June 2014 shown consistently that he is not afraid to make those hard choices. From limiting foreign currency borrowing of banks to 75% of shareholders’ funds, imposing a ban on the sale of intervention foreign exchange in the interbank to placing a ban on forex for the import of items like toothpicks, Indian incense, etc, Emefiele has tried at all times to prioritise productive activities in the allocation of scarce foreign exchange.
The latest in the series of these bold interventions by the Central Bank Governor is the announcement on Monday, January 11, 2016 that the apex bank would no longer sell foreign currencies to Bureaux de Change (BDCs) operators in the country. The new policy shift would hence compel the 2,786 BDCs franchise owners in various parts of Nigeria to source their share of forex from autonomous sources. According to the CBN, it would deploy effective monitoring and regulatory tools to ensure that whatever channels the BDC players choose to get their forex from, the nation’s anti-money laundering laws are not violated.
Beyond the obvious need to manage and prioritise the limited forex that now accrues to the CBN to critical productive sectors of the economy, this latest measure of the Central Bank is justified at several levels.
First, the action has stopped the decade old unscrupulous practice of BDC operators feeding fat on the arbitrage opportunity created by the system. For instance, the BDCs get forex from the CBN at the official price of N197 per dollar but turn around to sell to people at N270, making a profit of about N73 per dollar for doing close to nothing. This easy money has been the primary attraction of unscrupulous persons into the BDC business. The CBN has reported that before it started selling forex to BDCs, there were only 74 in 2005. Today, the number is 2,800 with an average of 150 applications for licences every month. The massive interest in DBC proprietorship is fuelled in the main by greed and the lure of easy money that comes with it.
Second, the BDCs who were conceptually meant to serve as an avenue for low and middle end users to access foreign exchange have over the years become a cesspit for corruption, rent seeking and currency substitution fuelling corruption and money laundering activities in the Nigerian economy. The regulation placed a limit at $5,000 per transaction but over time, one has realised that some BDCs undertake transactions worth millions of dollars in one fell swoop. Using FOREX pulled from CBN, the BDC operators have often times engaged in round tripping, currency speculations, hoarding and other business activities that are generally inimical to the nation’s economic interests. In the past, there have been reports of funds being sourced from the BDCs by persons engaging in illicit activities thereby violating the understanding upon which they earned their licences in the first place. One also realises that sometimes, the BDCs prefer to deal with black market operators whom they sell foreign currencies bought from CBN at official rates at over 50% profit margin. As the CBN governor, Emefiele pointed out, the kind gestures and the best intentions of a proactive CBN are being steadily violated by these economic operators who have refused to play by the rules. This defeats the main objective of the BDCs as an avenue for ordinary Nigerians to access foreign exchange at good rates.
Beyond the operational justification of the CBN’s action, it is important to appreciate the policy from the prism of economic rationalisation. BDCs, truth be said, are business entities. They are like commodity traders and their commodity in this instance is FOREX. BDCs hence are traders of foreign currencies. If we view it in this manner, is it not strange that they rely on the CBN (a non-“manufacturer”) to supply their “goods?” Let’s put it in better perspective: what would happen should mobile phone retailers, computer distributors or even food vendors go to CBN every week to get their supplies? Would it be fair if car dealers, fabrics sellers, furniture retailers approach CBN every Monday to demand for their goods and still go back to their shops, selling to their customers at prices way beyond what the supplier had recommended?
The truth is that the present economic situation has forced the re-evaluation of several policies which have failed to yield the intended result. Businessmen and women such as those who own BDCs must hence begin to see themselves as playing in a perfectly competitive market. It is a good thing that the CBN governor has directed operators who feel constrained by the new measure to approach the apex bank for a refund of the N35 million cautionary fee paid to the Bank and of course – have their licences withdrawn. There should be no sentiments or misreading of the new policy. It is purely an economic decision necessitated by prevailing economic realities.
• To be continued tomorrow.
GUARDIAN
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