Editor’s note: Are you confused by the recent hype around the actions of the Central Bank of Nigeria? The Legit.ng columnist 'Feyi Fawehinmi, a financial expert, is here to guide you through the intricacies of and manipulations in the Nigerian banking sector.
By the time you read this, Nigeria’s ongoing forex drama will probably have moved on to the next scene.
That said, intentionally or not, the Central Bank of Nigeria may have just played a blinder with its latest move. Interestingly, after announcing so many policies and reversals, this latest move has happened unofficially.
The currency wars
The CBN has always believed that the correct exchange rate for the Naira is roughly around the N200 to $1 mark. It believes that any demand that pushes the Naira higher than that mark is artificial – i.e., the work of speculators, round-trippers and such like. Remember that less than a year ago, the official exchange rate was around the N150 to $1 mark, so getting to the current N200 mark happened when CBN was forced, against its wish, to devalue the currency.
The problem with this approach is that speculators are hard to identify out of a crowd. Who is a speculator? Is it a producer that normally buys say, $1000 per month to import inputs but is desperately worried that the Naira will lose value over the coming months, and, as such, decides to buy $5000 now to protect himself and his business against such a devaluation? Or is it just a hustler who simply wants to buy dollars today and sell them later when the Naira loses value? Either way, it is tough to pick apart such people in a crowd in a way that allows you deny pure speculators without punishing genuine people.
The first move was to ban demand for forex if it was to import certain goods, 41 in all, that the CBN felt were pointless. Effectively, that demand was pushed to the black market meaning that those importers were suddenly faced with something like an extra N30 on every dollar they purchased from the black market. This move bought the CBN temporary respite, but it was an illusory one. The fact that people importing the banned items could no longer buy at the official interbank rate does not mean that the demand has disappeared – it has merely been shifted elsewhere. The effect of this was that the gap – or the spread – between the official rate and the black market rate started to widen. This created a new problem because the wider the gap between the interbank and black market rate, the more tempting and profitable it is for people to find any way possible to buy at the cheaper rate and sell at the more expensive one – i.e., the very speculation that the CBN was trying to stop, would then increase as a result of the CBN’s actions.
But then, as if by magic, something started to happen last week. Stanbic IBTC kicked things off by telling its customers it would no longer accept foreign currency deposits from its customers looking to deposit dollars (cash) into their domiciliary accounts in Nigeria. Before long, every other bank was sending out emails to their customers saying the same thing. So if you have dollars (or pounds or euros) in cash, you are currently unable to pay it into your dom account. This sounds really strange. So what’s going on?
Before the elections
Let’s go back to earlier this year before the elections. There were stories about how dollars were scarce everywhere because ‘politicians’ were buying it all up. In typical Nigerian fashion, the fact that elections were approaching made people start acting in all sorts of ways. There was also a lot of cash in the system presumably from people who were making a lot of money from the politicians, some of it in dollars. Well, the elections have come and gone, and the heavens did not fall. But all that cash is still out there, presumably.
When you deposit foreign currency in cash into your domiciliary account, that money is technically useless to the bank in cash form. The only way to make it useful is to convert it to electronic form where it can be moved around from one customer to another or to another country. The other option of course is to convert it to Naira. The important thing here is that keeping the dollars in cash is expensive for the banks – it costs money to insure and cannot generate any interest just by sitting in their vault.
Come to Daddy
In the first instance, banks used to convert the cash to electronic form either by selling it to Travelex for a 1.5% charge; i.e., Travelex would take the cash from them and then credit the bank’s balance with them. From there, the bank could then move the money around the world depending on what it needed to do. Alternatively, you could simply sell the dollars to bureau de change (BDC) if having Naira was more important to you. All that has now changed.
First, CBN banned the banks from selling their dollars to the BDCs. This wasn’t hard to enforce as the CBN could swiftly take away the licence of any BDC that didn’t obey its instructions. Second, the CBN also blocked banks from moving their foreign currency out of the country using Travelex unless the bank got an approval from it. Once those two avenues to get rid of foreign currency had been blocked, the banks were left with only one outlet for their foreign currency – the CBN itself.
And then CBN introduced an eye-watering charge of 5% for any bank that wanted to convert its foreign cash to electronic form through it. This is why you have been getting those emails from your banks. Will you be happy to deposit $100 with your bank and have your account credited with $95? It makes absolutely no sense except you are one type of person – a money launderer. And if you are a money launderer willing to pay a 5% charge to deposit your own money into your own account, then it is dangerous for the bank to take your money anyway. So the banks were left with no choice but to stop accepting ‘useless’ money.
Back to the story of the people who amassed dollars in the run up to the elections. Now that elections are over and things are less hysterical, it’s time to bring out the dollars and change it to Naira. But now they can’t wash that money through the banking system, so the only option for people who have large amounts of dollars in cash is to head to the black market to change it to Naira (or leave it under their mattress). This of course means that, all of a sudden, the reverse of a few months ago has happened – we now have an oversupply of dollars, meaning the Naira has started appreciating, and the gap between the official rate and the black market has shrunk.
If you are the CBN governor, you might be tempted to shout "Blooming marvellous!" as you down a bottle of made-in-Nigeria Moët & Chandon (I know, I know). You have succeeded in causing confusion in the camp of the speculators (if we can call them that), as well as brought the black market closer to the official rate thereby further reducing the temptation for people to engage in round tripping.
All is well with the world. Or is it?
Remember that this movie has no end – it simply moves on to the next scene. At some point, people will find a way to get their cash into the system so they can pay for things abroad. Or maybe the smuggling of physical cash across borders or on flights outside the country will increase exponentially. At some point, the convergence between the official and black market rates will end. The next direction is anyone’s guess.
This is all ‘fun’ and ‘exciting’ but one thing is for sure – this is no way for a Central Bank to manage a country’s exchange rate, if at all it needs to be managed.
We await the next episode.
'Feyi Fawehinmi is an accountant and has worked in financial services in the UK for close to a decade now. He writes about socio-political issues in Nigeria from an economic point of view. He blogs at aguntasolo.com and has been published in newspapers and syndicated across blogs in Nigeria. Follow him on Twitter and Facebook.
The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of Legit.ng.