When a regulator kicks: FX prophets everywhere (2)

By Adolphus Aletor

I wrote part one of this article in August when the Central Bank of Nigeria (CBN) embarked on a major policy shift in addressing the issues surrounding the continuous fall in the value of the Naira. I deliberately made it part one as I planned to review the impact of the policy at a later date. I intended to do the review by the end of the year since it may look premature after two months for a review of such a major policty. However, the recent occurrence has prompted the interruption; and for a fast-paced environment like Nigeria’s, multiple reviews would not be a bad idea. Again, my total support for the new policy was predicated on several assumptions and prospective steps that I expected the federal government would take. With a recent occurrence indicative of a deviation, it became imminent for a quick review.

My Assumptions

While supporting the decision of the Central Bank, I had assumed four major decisions or steps the regulator would take in quick succession since the decision to suspend the sales of forex to BDCs seemed popular, generally acceptable and courageous. While clamping down on a sector and with so much vigour and courage, the CBN had set a tone of an aggressive approach in a manner that will address everything that stood against the Naira. It looked like they were acting a chapter from a playbook. I have waited for another chapter that I assumed would cover the following:

An aggressive export incentive for small and medium enterprises was one major action calling for the attention of the federal government. Export incentives are regulatory, legal, monetary, or tax programmes that are designed to encourage businesses to export certain types of goods or services. Exports are goods that are produced in one country and are then transported to another country for sale or trade. I advocate for incentives called ‘pure exporter subsidies’ which usually take the form of tax rebates that are conditional on a firm exporting all or most of its production. I expected the federal government to creatively and courageously drive this with the level of support it currently enjoys.

I read a report on the $250 billion export market currently wasting away due to frivolous charges, fees and rates at Nigeria’s airport. The report published in The Guardian newspaper reported that about 69% of charges at the airport was illegal and that while stakeholders claimed that an agro-allied market with potential market size of $250 billion is allowed to waste, despite our import to export ratio standing at 87:13, no one has thought of the opportunity in this space. The ultimate implication of this is the refusal of cargo planes to lift goods from Nigeria. It was reported that these cargo planes would rather go to neighbouring countries to lift products or load their planes with sandbags to give the plane buoyancy on their return flight. We also recently learnt of vessels and containers used for import, and which would have been used for corresponding export, leaving our wharf and jetties empty.

The report revealed that it cost $35,000 to load an average of 100 tonnes of cargo from Nigeria while in Ghana it is only $4000. The volume of cargo leaving Nigeria was put at 20,000 tonnes a week while a country like Kenya does about 620,000 tonnes every night. The items being exported were identified as palm oil, cashew, cocoa, soya beans, rubber, rice, petrochemical, leather, ginger, cotton and Shea butter, tomato, banana and plantain, cassava, cowpeas, and spices. While small business owners struggle to aggregate, package and export the above items for foreign currency, government agencies set financial hurdles for them in the name of fees, charges and rates. Some of the huddles belong to; Anti-Bomb Squad of the Nigeria Police Force, National Agency for Food, Drug Administration and Control (NAFDAC), Standard Organisation of Nigeria (SON), National Drug Law Enforcement Agency (NDLEA), Federal Airport Authority of Nigeria (FAAN), etc. Without these hurdles, Nigerian small businesses would export more commodities and generate more forex for sustenance.

A team of federal government delegates visited China some time ago and returned to apply their experience to the Nigerian populace in the area of stifling and controlling access to the internet and social media. Another thing the team would have also observed during their visit is the “pure exporter subsidies’’ practiced by the Chinese government. This involves granting a 50% reduction in the corporate income tax rate for companies that export over 70% of their produce. By locating in one of the numerous special economic zones, firms could benefit from an even lower rate. In addition, VAT rebates and lower tariffs on imported machinery and intermediate inputs, direct cash subsidies, discounted utility and land rental rates and easier access to finance formed part of the incentives. The Chinese have used these incentives to generate a lot of foreign exchange to conquer the global economy making them number one. There is no reason why Nigeria cannot replicate this.

The CBN has taken many steps to stabilize the Naira, including giving cash incentives for any dollar received. As good as this may sound, this only amounts to flapping your feet in a pool without movement. My boss used to call it motion without movement. The beneficiary who gets the incentive does not determine how much of forex comes into the country and for as long as the incentive is not directed at the owner and to empower him to generate more, the prophets will always be on point prophesying the value of the Naira.

The apex bank recently clamped down on a website that provides uniform information for the black market forex rate. To me, this seemed to be out of their playbook and carried out spontaneously. While I do not support the activities of the website and its owners if what they have been accused of, i.e. setting rates, is true, I think that the action has further thrown a dark cloud over the dynamics of forex in the black market. The black market has, therefore, become a seller’s market as no informed decision would be made before purchase. The CBN has been focused on their action so, I encourage them to continue with that singular focus.

The authorities in encouraging the flow of forex may have used Futures, swaps, spots, etc. and now find it difficult to meet their obligations to concerned parties. For instance, the investment in Dangote Refinery that has seen banks insisting on the borrower meeting their repayment obligations after an initial restructuring could be creatively structured. The banks need to be protected, the refinery is of major interest to the federal government; and at the same time, the welfare of the citizenry. There could be a compensatory and flexible policy between the banks and the regulator. Reduce CRR, suspend penalties for non-complying LD ratio and then figure a way to appropriate the forex available. Starving one sector to favour another will bring distrust and that is why dollar owners rather than bring in their dollars now prefer to leave it abroad.

If I were the CBN governor, I would not patronize the Diaspora. I would focus on those slugging it out here and empower them to make the economy stronger. Diaspora remittance is fine, but depending on it to run the economy speaks high volume. Why should the federal government depend on the resources of those that left for greener pastures as a result of their perceived state of the nation? This does not look like the optimal choice of action on the part of our government.

My Conclusion

An aggressive application of the Chinese template would see our Naira breath again. The CBN should midwife and harmonize all the legal and illegal rates at the airport and give cash subsidies to any company that successfully exports its product branded with the Nigerian flag.

When these SME exporters receive payments, the government should allow beneficiaries to determine the appropriation of their inflows. Making it compulsory for it to be sold to specific buyers and at a particular rate does not cut it. That is why most exporters now prefer to receive their payments into an offshore account opened abroad and operate P2P for its utilization. None of the proceeds finds its way to the Nigerian economy anymore. Government should focus on the forex generated from crude oil sales and other related sources.

The Nigerian economy is highly informal and what is happening now is a reflection of the power and influence of that obscure but powerful informal sector. Turning Nigeria into a command economy will continue to make everyone a forex prophet in Nigeria.

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Adolphus Aletor, FCA, MCIB, a banker and finance analyst, is the managing director/CEO, Rigo Microfinance Bank; he can be reached on +2348033410380 (WhatsApp only) or jiyere@yahoo.com