‘Panicking’ as policy option to stem Nigeria’s FX crises

Apparently overwhelmed by the endless crashing of the Naira against the dollar (and other hard currencies) in the foreign exchange (forex) market for some months now, the monetary authorities have been taking steps and measures that portray panic and desperation. This is best evidenced by the flurry of circulars, memos, press releases and so on directed mostly at deposit money banks (DMBs): all containing directives and/or orders from the Central Bank of Nigeria (CBN) regarding forex management. For over a month now, hardly was there any day that the apex bank did not issue a memo or circular to the DMBs, giving fresh orders and threats on matters pertaining to forex.

As the Naira remained on a tailspin despite the CBN’s initiatives to stem the tide, the apex bank elected to turn the heat on the DMBs, portraying them as ‘hoarders’ of huge amounts of the badly needed US greenback and others. Thus, a memo came directing the DBMs to ‘off-load’ all their “excess” loads of forex within 24 hours — specifically between January 31 and February 1, 2024. In the memo, the CBN warned banks “against hoarding excess foreign currencies for profit.” As a backdrop, the apex bank said it believed some commercial banks held long-term forex positions to enable them profit from the volatile movement of exchange rates.

The circular titled: “Harmonization of Reporting Requirements on Foreign Currency Exposures of Banks”, also introduced a new set of guidelines aimed at reducing risks associated with banks holding long-term forex positions. In closing the circular, the CBN warned that non-compliance with the (new) Net Open Position (NOP) limit would result in “immediate sanction and suspension from [the] forex market.” Interestingly, this circular came barely 48 hours after the CBN had issued another circular, warning banks and forex dealers against reporting false exchange rates, among others.

Indeed, on a particular day (February 14, 2024), the apex bank issued three circulars. In the first circular, the CBN stopped banks from paying Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) to their customers in cash — a practice that has been in place for decades. In a second circular, it asked International Oil Companies (IOCs) to stop repatriating all their revenues to their parent companies at once. They (IOCs) should be sending them in two halves at separate times, henceforth. Yet, in a third circular, the apex bank reviewed its guidelines to stop under-invoicing of exports and over-invoicing of imports.

Regarding the PTAs/BTAs, the CBN said in its circular that “in line with the Bank’s commitment to ensuring transparency and stability in the forex market and avoid forex malpractices, all authorized dealer banks shall henceforth effect payout of PTA/BTA through electronic channels only, including debit or credit cards.” It added that “for the avoidance of doubt, payment of PTA/BTA by cash is no longer permitted. Authorized dealers and the general public are hereby directed to note and comply accordingly.”

In addition to the above referenced memos and circulars from the apex bank in recent weeks, there have been so many others, especially to bureau de change (BDC) operators. Indeed, propped or prompted by the apex bank, the Office of the National Security Adviser (ONSA) had also ‘unleashed’ officials of the Economic and Financial Crimes Commission (EFCC) and other security agencies to ‘storm’ BDCs in certain locations across the country. It is widely suspected that the BDC operators and their collaborators/financiers mainly act as speculators in the forex market.

Unsurprisingly, while the CBN and its collaborators have been literally scavenging and combing the vaults of the DMBs to let them ‘vomit’ the so-called excess forex holdings, the Naira sustained its collapse in the forex market. At best the apex bank has only succeeded in going to great lengths to ‘demonize’ the DMBs, by giving the impression that they (DMBs) have been making ‘cheap profits’ on the back of the volatility in the forex market. No wonder the CBN, through a series of circulars, had gone to great lengths in ‘teaching’ the banks the dangers and risks inherent in their holding huge forex long-term.

In the face of the barrage of panic-driven circulars from the apex bank, the Naira which stood at about N1,042 per dollar by year-end 2023, had sharply dropped to about N1,400 per dollar by end-January 2024; and by mid-February 2024, it had collapsed to N1,500 per dollar — all in the official forex window. In the parallel window, the Naira is already going for about N2000 per dollar. And as the CBN and its allies keep hounding the banks and BDCs to stabilize the forex market, it is not unlikely that in a matter of days, the Naira would drop beyond N2000 per dollar. And could continue crashing thereafter!

The lesson so far for the CBN and its allies should be that the solution to the ineluctable fate of the Naira does not lie in what they have been doing. The antidote to the crash of the Naira could be found mainly elsewhere — and really based on long-term, sustainable initiatives. Truly, the genesis of the Naira collapse is directly traceable to the full floatation of the currency via a memo from the CBN in June 2023. Forex scarcity in the Nigerian system does not support full floatation of the currency: demand for dollars outrageously and consistently outstrips the supply.

In this milieu, with inflow from crude oil sales as the only major source of forex supply and high penchant and preference for imported goods by most Nigerians, Naira floatation amounts to wittingly taking the national currency to the gallows. The Nigerian economy has not been effectively diversified to the extent that a number of non-oil items could be exported to yield substantial forex inflow. Successive governments in the past have essentially been paying lip service to the diversification of the economy. At best, they have merely deployed it as only a slogan or mantra, or even propaganda.

This is why rather than embarking on some ruinous or ominous strategies to stem the sliding of the Naira (in the forex market), the CBN should wear its thinking cap properly. There are no short-term solutions to the crashing Naira. Indeed, current panic measures such as forcefully ‘withholding’ IOCs’ money, have the capacity to send wrong signals to the global public, including potential investors. Permitting the IOCs to repatriate only half of their legally earned money and withholding the other half ‘for a-while’ could turn counterproductive. What is the practice in other climes? 

Will this desperate measure of forcibly ‘withholding’ well-earned incomes of the IOCs not further prompt more of them to want to exit Nigeria? As a matter of fact, not a few of these ‘oil giants’ have been leaving the Nigerian shores in droves, and relocating to other more conducive environments across the globe. This is why in the search for a quick solution to the sliding Naira, the apex bank must restrain itself from crossing ‘normal boundaries.’

Let the Nigerian government commence, like yesterday, making the country productive; entrench non-oil export drive; curtail Nigerians’ high taste for imported items and make them patronize ‘Made in Nigeria’ goods. Rummaging bank vaults, seizing IOCs’ monies and hounding BDC operators, among others, can only project the country in bad light and scare away prospective investors.

• business a.m. commits to publishing a diversity of views, opinions and comments. It, therefore, welcomes your reaction to this and any of our articles via email: comment@businessamlive.com