The Problem With The Naira By Ijeoma Nwogwugwu
Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria (CBN), has been tinkering with his monetary policy regime in recent weeks, most of which have been targeted at defending the naira. While price stability has also been the overriding interest of the governor, and has seen the CBN maintaining a tight monetary stance for almost two years, a bigger worry has been the value of the naira.
In order to maintain the exchange rate of the naira within a band of N150 – N160 to the US dollar, the CBN, last August, sterilised 50 per cent of public sector funds by raising the cash reserve requirement on funds belonging to the three tiers of government. The immediate impact of the policy was the spike in interest rates at the interbank market as well as rates charged by banks on commercial loans. But the primary objective of the central bank, which was to further tighten liquidity in order to stem speculative attacks on the naira, still fell short of expectations.
Exacerbated by the inconsequential impact the sterlisation of public sector funds had on the value of the naira, the central bank adopted a number of new measures, one of which was the revocation of licences of 20 bureau de change operators. Others included the reinstatement of the Retail Dutch Auction System as the CBN window through which banks could procure foreign exchange on behalf of their customers; increased the annual limit on the naira credit card from $40,000 to $150,000; and banned the importation of foreign currency, stipulating that foreign exchange transfers into Nigerians must be paid in naira at the prevailing interbank rate.
In defence of the measures, Sanusi said Nigeria had overtaken Russia as the largest importer of foreign currency, insisting that no country in the world pays its citizens in foreign currency for transfers into their economies. However, what Sanusi refused to voice was his concern that the demand for foreign currency by politically exposed persons had reached alarming proportions as the 2015 elections draw near.
With every election cycle since 1999, the central bank has been forced to anticipate the rising demand for foreign currency by politicians who need to spend obscene amounts of money during electioneering. But as 2015 looms, the introduction of the cashless policy has combined with the inconvenience of carrying large amounts of local cash, to make foreign currency more attractive to politicians who have to either throw away cash to “win” the hearts and minds of the electorate, party officials and electoral officials or stash away their ill-gotten loot in smaller, more manageable bills. Add to this the spike in demand for foreign currency among foreign and institutional investors who would prefer to hold their cash in dollars with the ever-rising political uncertainty that every election cycle brings.
That is the real crux of the matter which the central bank has very little capacity to control, because despite all the measures, the naira keeps depreciating in the interbank and parallel markets, while foreign exchange reserves accretion continues to head south. With the release of N1.2 trillion to the three tiers of government last week, following the Federation Account Allocation Committee (FAAC) meeting, the demand pressure for the US dollar is expected to be rapacious in the weeks ahead.
Of major concern to Sanusi is the fact that Nigeria is an import-dependent economy. Other than a few essential food crops, we literally import everything we need in the country. This means that when there is a speculative attack on the local currency, it inevitably results in import-induced inflation, a scenario that gives Sanusi sleepless nights. But while Sanusi has recorded some success at keeping the rate of inflation in check and has even managed to keep it at single-digit for most of this year, he has had little success at curbing the demand for foreign currency and its adverse effect on foreign reserves accretion.
A way out is for Sanusi to stop being emotional about the naira and allow a gradual depreciation of the currency. Depreciation of a country’s currency, as opposed to devaluation, is a better option as it allows the currency to decrease in value due to the interplay of market forces. As politically incorrect as this recommendation may appear, surely Sanusi must know that Nigeria’s budgeted crude oil production target of 2.53 million barrels per day has hardly been met this year.
Unbridled crude oil theft and vandalism have eroded whatever gains the country could have enjoyed from crude oil selling at an average of $105 per barrel for much of this year. The result is that earnings from crude oil, which account for almost 90 per cent of foreign exchange receipts, have fallen short of expectations and reserves accretion has taken a back seat.
On the other hand, if the central bank is desirous of curtailing foreign currency demand from autonomous sources such as the interbank and parallel markets and at the same time reducing the demand for cash through the official foreign exchange window of the central bank, it should revise upwards the restriction on the procurement of foreign exchange for Business and Personal Travel Allowances (BTA and PTA) through the introduction of electronic purses with the use of Visa or MasterCard. That way, the central bank would increase financial inclusion and limit money laundering, as transactions will be better monitored through electronic channels.
Similarly, the restriction on daily outbound foreign currency transfers should be relaxed by the central bank. At the moment, the CBN imposes a daily limit of $10,000, but such rules have outlived their uses if a commercial bank has done a proper Know Your Customer (KYC) for the account holder and duly reports it. Besides, it is such arcane rules that encourage the importation of foreign currency.
Realistically, there is an urgent need for a review of CBN’s foreign exchange rules. As Sanusi prepares to step down nine months from now, he should use the time to align the rules with modern practices and make them easy to operate. Most transactions should be made eligible and in reasonable amounts to curb the demand for cash in foreign currency denominations. But more importantly, CBN’s foreign exchange monitoring function needs to be upgraded to anticipate the ebb and flow of the market and improve its capacity to track legitimate and illegitimate transactions.
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