Analysis of CBN's Forex policy and what Nigeria needs

Franklin Izuchukwu

Here is a comprehensive approach to the Forex policies implemented by the Central bank of Nigeria and solutions that can salvage the volatile Forex market in Nigeria.

Building complex of the Central Bank of Nigeria

Financial experts have a lot to say about why the Naira is falling or the downward trajectory of the Nigerian economy since the inception of the country, but what happened to one of the manifested symptoms of a failing economy - the foreign Exchange (Forex)?

With the Central bank of Nigeria (CBN) under intense pressure to regulate the Nigerian economy, the apex bank has rolled out numerous policies to control the Forex market and the Nigerian economy.

One of the controversial Forex policies instituted by the CBN was the ban of Forex sales to Burea De Change (BDC) operators in July 2021. The CBN claimed the policy was in pursuant of stalling the corrupt practices emanating from the BDC operators.

Another Forex policy was implemented around July 2020, when Nigerian banks began sending out notifications to customers about reducing their spending limit to 100 USD for international transactions.

Close observation will show that a receding Forex prompted such drastic decisions; thus, the federal government keeps implementing forex policies to increase the foreign reserve even if it is only a short-term solution.

These policies implemented by the CBN might be goal-oriented and geared towards achieving a better economy for Nigerians, but it is viewed as ill-defined by some quarters. Some stakeholders are eager to see the CBN develop a long-term fix for the economy.

Some schools of thought also view the Forex policies implemented by CBN as treating the disease's symptoms that do not affect the condition's underlying cause.

The scarcity of Forex is primarily attributed to the forces of demand and supply, which portrays that the Nigerian market has a higher importation number than export; in essence, the supply of Forex is limited because Nigeria is not a net exporter.

There will be an objective critique of the CBN's Forex policies and the Nigerian economy. It should also highlight Analysts' thoughts and more viable solutions to salvage the Nigerian economy.

The Nigerian market needs a net inflow of Forex.

Recent Forex policies from CBN

The Globaledge estimated in 2020 that the Oil sector contributes to about 95% of Nigeria's Forex. Hence, it was no surprise when there was a Forex decline in the early quarters of 2020 as the price of crude oil fell following the tog war between Russia and Saudi Arabia.

Crude oil also experienced another cascading fall sequel to the coronavirus pandemic, which hit heavily in march 2020.

After the two events, Nigeria saw its access to Forex plummet with an impending economic crisis. As the value of Naira began slipping, there was pressure on the CBN to devalue the currency. From the first quarter of 2020, The CBN has implemented multiple policies to salvage the Naira.

For instance, on March 12th, the CBN denied rumours to devalue the Nigerian currency. It blamed "unscrupulous players in the foreign exchange market" as responsible for the story.

The Central Bank of Nigeria later sent shockwaves to the market when it disclosed immediate plans to stop the sale of Forex to BDC on July 27th 2021. The announcement saw the price of Naira fall from N505/$1 to N570/$1 in the black market at the time.

In its effort to increase Forex inflow, the CBN later rolled out the 'Naira 4 Dollar Scheme', which credits recipients of diaspora remittances N5 for every 1 Dollar remitted. However, after much speculation about the effectiveness of this strategy, in February 2022, the apex bank revealed an increased diaspora remittance from $6 million to $100 million weekly.

In another policy implementation, the central bank threatened to expel Exporters who refused to remit Forex proceeds to the Nigerian Autonomous Foreign Exchange Rate (NAFEX) market. The CBN was keen on increasing Forex supply, especially with its later warning that Financial companies should not pay diaspora remittances in Naira.

Current trends have shown policy after policy, yet the CBN is yet to checkmate the problem by solving the Forex crisis. Naira has always been on the losing end and trades at N570 per 1 USD at this writing.

If the constant intervention from the CBN has failed to recuperate the Nigerian Forex market, then something must be wrong, and a new approach is needed.

Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele.

CBN keeps intervening in the Forex market

The Nigeria Forex system does not support a flexible economic system that reflects Forex's actual demand and supply. A Forex system that reflects the daily market and supply will undoubtedly show the financial reality at any point in time.

The Central Bank of Nigeria dictates the value of the Nigerian Naira (NGN); it achieves this by literally stating the exchange rates of NGN against other currencies and by rolling out interventionist policies that affect the balance of the currency directly.

On 6th August 2020, Apex bank revealed that it would be adjusting the official exchange rate from N360.1/$1 to N380/$1. CBN later modified the rate to N386/$1 just after 21 days; all these were done to reflect the current realities of Forex in Nigeria.

In another interventionist move, 50 million dollars was pumped into the Forex market as a test trade to gauge the level of the dollar.

It is worth stating that the sale of Forex to BDCs by CBN was one of the interventionist policies formulated to ease the pressure on Naira and add more liquidity to the Forex market.

For instance, on 7th October 2020, the CBN injected over $450 million into the Forex market through BDCs; However, gains were recorded, but it was never sustainable as BDCs complained that they needed more Forex to meet their obligation.

According to CBN Governor Godwin Emefiele, Nigeria is the only country that sells Forex to BDCs. The CBN halted this intervention policy after concluding that it was never sustainable.

In a bid to increase the supply of Forex, the apex bank had also implemented a policy that should encourage diaspora remittances to Nigeria, like the Naira 4 Dollar Scheme.

CBN also instructed Nigerian Banks and IMTOs to transfer all diaspora remittances into the domiciliary accounts of the recipients and not Naira accounts.

Bureau De Change operators exchanging dollar for naira.

Forex policies that can salvage the Naira

Unlike other countries where the Forex market is market-driven, the CBN is the principal custodian of the Nigerian Forex market.

As stated earlier, the CBN regularly intervenes in the Nigerian Forex market, and these periodic interventions is a welcome development in many parts of the country.

It is suitable for those who believe that the Nigerian Economy is developing and may not survive the shock that will follow suit if the CBN implements a hand-off approach.

The CBN unilaterally determines the official exchange rates of the NGN. The resultant effects of this archaic policy are evident in the rising difference between the official market and parallel market rate.

The world bank pointed out a significant spread between the official and the parallel rate. It disclosed that between 2020 and April 2021, that rate was at a staggering 27%.

The World Bank acknowledged that the CBN has made moves to unify the markets but has refused to adopt a more market-friendly policy, floating the Naira to allow market forces to determine its actual value.

The Nigeria Forex market has lost its confidence because speculators seek to profit from the depreciating Naira. A flexible and market-driven FX will increase liquidity by incentivizing oil and non-oil importers to sell their dollar inflows to the official market.

Once liquidity increases, the market will get rid of speculators and prompt genuine demand for Forex.

A good percentage of Nigerians are demanding Forex because they lost hope in the FX market and want to preserve their wealth in foreign currencies; a market-driven Forex can restore confidence among the populace.

Solutions for Forex shortages in Nigeria

The Naira4Doallar scheme policy has increased diaspora remittance to the country, but this policy is not sustainable enough to solve the Forex shortage faced by Nigeria.

The first step to solving these problems is identifying other FX sources that may be more sustainable in the long run; such will have a resounding effect.

The 4 significant sources of forex inflow into Nigeria include;

  • Proceeds from oil exports,
  • Proceeds from non-oil exports,
  • Diaspora remittances and 
  • Foreign Direct/Portfolio Investments.

The Government can take the following steps to increase FX remittance into Nigeria;

Forex shortages in Nigeria could drive up inflation and affect the standard of living.

  • Revamp the Oil and Gas sector

    Nigeria is a known oil-producing country that has since geared its energy into reaping the benefits of Oil exportation.

    Although the proceeds from oil sales are the primary source of Forex and budget implementation in Nigeria, the country has been adamant about developing the oil sector into a more sophisticated domain.

    Often, Nigeria has been unable to meet the quota given to it by OPEC. As recently as January 2021, the country was still unable to reach the mark.

    Such incompetence ensures that Forex proceeds from Oil will not increase and can spiral downward when Oil prices fall in the international market.

    The gas sector is a relatively untapped source of Forex proceed in Nigeria. The Nigeria government has so far been paying lip service to the development of the industry.

    Nigeria is sitting on a 600 trillion cubic feet reserve of gas; the government must enact policies to develop the gas sector which can help increase FX inflow.

  • Diversify the economy by developing the non-oil sector

    Nigeria's dependence on the oil sector as a significant source of revenue is overwhelming.

    There have been calls from economic experts on the need to diversify the economy to increase forex inflow and reduce the effects or a potential shock from dwindling oil prices.

    The Central Bank of Nigeria seems to have had an epiphany in this regard when it announced the RT200 FX Programme, which seeks to generate 200 billion USD in Forex repatriation.

    The RT200 FX Programme will focus the Non-oil exports; it will fund the construction of terminals and reduce delays experienced by exporters.

    The federal government can also adopt a digital interface to reduce human interference in the port facilities.

    A robust digital platform will reduce corruption, unethical activities and delays; it will also make exportation seamless, increasing Forex inflow.

  • Implement policies that attracts Foreign Direct Investments (FDIs)

    Foreign Direct Investments is a crucial source of Forex inflow in the Nigerian economy but has faced several discouraging onslaughts in the past decades. According to Proshareng, FDIs has reduced to a mediocre of $981m in 2017 from $5bn in 2008.

    The Nigeria government can increase Forex remittance by addressing the problems that affect FDI in the country.

    Potential investors interested in long-term investments may not be thrilled with Nigeria because of the undiversified economy. As tracked by the National Bureau of Statistics, when the oil price is high, FDIs increase and vice versa.

    For instance, FDIs increased around 2014 to $2.7bn when the oil price peaked but receded, as shown in the 2017 figure when the oil price was going down.

    Prolonged insecurity and lack of infrastructures like power supply and good road network is another deterrent to FDIs. Investors also complain that although Nigeria may have a population, the Market is not viable because of the high poverty rate and unemployment.

image from unsplash.

Conclusion

Apart from the above problems that have affected Forex inflow in Nigeria, the Government must also address other underlying root causes to these problems to effect positive changes.

The political system was designed to encourage corruption, nepotism over meritocracy and misappropriation of funds and insecurity. The lack of accountability in the Nigerian political system has eroded confidence in the electoral process and favours the political elites to disregard the rule of law.

An excellent political system will ensure the right professionals are appointed to manage economic affairs. A sound system will discourage bias and enforce equal implementation of the rule of law.

The current political system is why draconian laws with weak legal frameworks exist. It impedes progress and discourages investments in the country.

An accountable political system is the only sustainable solution to the Forex shortage faced by Nigeria; nothing less can suffice.