Why is the Central Bank of Nigeria (CBN) visibly nervous about the foreign exchange (forex) market in the country? In the past two months, the CBN has made several flawed monetary policies capable of scaring foreign and domestic investors.

Last week, all the banks in Nigeria notified their customers that as from August 1, 2015, deposit of foreign currencies wouldn’t be accepted, in cash, even into a customer’s domiciliary account. Less than 24 hours later, without warning, the policy became effective.

Those who arrived at their banks to deposit the few US dollars they had were turned down, and asked to go home with the money. Those who wanted to pay for tuition fees of overseas students or businesses instantly got a rejection order. Pandemonium, confusion, panic and despair filled the banking halls on July 31st. Everyone went home disappointed.

This policy is unsustainable; Economists at the CBN should know better. The rash, overactive decision can only create more turmoil in the forex markets. It can’t and will not work because the refusal to accept deposits in forex will naturally create illicit funds transfers across Nigeria’s borders. In the long run, the spikes would lead to higher exchange rate or weaker Naira.

Yes, the initial market reaction would prompt the exchange rate to fall but rates will naturally climb higher after the short gains. This is dangerous for our economy.

Over dependence on oil has done very little to boost Nigeria’s economy, and until we resolve to finding export in other sectors, the cowboy approach to our monetary policy will only bring undue hardship to importers/business people.

As at the time of writing this article, oil prices had slumped to mere $47 per barrel; the projection is less than $45 per barrel in the next three months. Iran, one of the world’s largest producers of crude is gearing to reappear on the world’s stage; further oil price decline is expected. This means Naira, Nigeria’s currency, will naturally weaken against the United States dollar, to at least, N250 to the dollar.

If we can’t find other products to export, the only rational way to stabilise our currency is to allow market forces determine the true value of the Naira at all times. It is the responsibility of the apex bank to control the fiscal and monetary policies of this great nation at this time of our fragile economic disposition. Plans must be carefully tested and analysed before enforcement.

The excuse that the policy is meant to check money laundering in the system is unnecessary because it is better for depositors to expose themselves, and those with large sums should be questioned for the source of their funds.

Nigeria is not the only country suffering from shortage of foreign currency, or United States dollars to be precise. Venezuela, another major producer of oil is facing the same problem. According to the Economist Magazine of July 25-31st, page 27, “this month Venezuela’s currency, the Bolivar, passed a melancholy mile stone: its value on the black market is now a hundredth of what it is supposed to be at the main official exchange rate. The Central Bank of Venezuela insists on the exchange rate of 6.3 bolivares to the dollar, but it will cost you 630 bolivares to buy one US dollar from the parallel market. As the country’s stock of hard currency shrinks and the Central bank prints money to plug a huge budget deficit, the bolivar’s collapse is accelerating. It is now worth a thousandth of what it was in 1999. Venezuela may be on the verge of hyperinflation. The government of that country uses a labyrinthine system of price and exchange controls to shield Venezuelans from soaring prices but these make matters worse. Just like Nigeria, price ceilings have devastated local production; factories are operating at half -capacity.”

Various theories uphold the CBN’s action as cure not prevention. If the apex bank believes that there is so much dollars in the hands of the public, the only way to verify and manage such claims is to allow the banks keep the funds; it’s the best and most effective way to curb such a menace. What will happen is this: Nigerians will devise a means to haul large sums of US dollars abroad. These funds will pass through the ports, irrespective of the established laws prohibiting currency trafficking. On the other hand, foreign currency owners will hoard at home, all their monies, and wait for the usual period of calm after a storm.

Demand for US dollars will never subside in Nigeria until there are local products to offset the high taste for foreign goods. For instance, with low standards and poor quality of education, it’s estimated that Nigerians, alone, spend in excess of $1.5 billion annually on students in the United Kingdom. The majority of parents with children in schools abroad buy US dollars or pounds in the parallel markets, in cash, and remit through domiciliary accounts. If the government wants to discourage this procedure, it’s better to give adequate timeline for everyone to prepare for the new policy. Instant or immediate stoppage of an old habit is virtually impossible. This new, draconian regulation counters a sound macro-economic policy.

Already, investors are in a state of fret: according to the Nigerian Stock Exchange (NSE) foreign investors alarmed by the uncertainty in the economic environment in the country pulled out N303.59 billion from the NSE between January and June, 2015.

A report on foreign portfolio investment (FPI) for the first half of the year obtained at the weekend, indicated that about 52 per cent of total foreign transaction value during the six months were divestment, underlining the sell pressure being experienced on the stock market.

Total foreign portfolio investment outflow during the period stood at N303.59 billion as against inflow of N285.40 billion, representing a deficit of N18.2billion. The half year deficit represents a relatively larger value given the significant under valuation of the Nigerian equities and the extended deficit Nigeria had suffered since 2013.

The latest action of the CBN will further scare foreign investors, which will lead to further divestments from Nigeria. The Banker’s bank must be careful in enacting hasty policy that will surely undermine its credibility as a trusted, efficient and reliable institution capable of managing our country’s economy.

The primary function of a central bank is to control the nation’s money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis.

Since the beginning of this year, the Central Bank of Nigeria has been operating forex markets purely on demand and supply theory, which is the only reason why it can’t get it right up till now.

Foreign exchange is a prime factor in macro-economics, and as long as Nigeria is import-dependent, demand for foreign currencies will remain inelastic.

There is absolute glut of oil in the world, and the situation seems helpless. Smart and wise leaders of oil producing countries have long expanded their economic base in other industries like technology, agriculture, and tourism. Therefore, market forces determine exchange rates, not legislation as in our case.

Bureau De Change (BDC) must be flooded with dollars to meet demand. For now, Naira will appreciate but will surely weaken further.

If the Central bank of Nigeria, due to inefficiency, is incapable of holding foreign currencies for banks’ depositors, then we have a real problem. Unfortunately, the apex bank’s reactions have shown a very weak and unstable leadership.

— Source:
http://leadership.ng/columns/452516/forex-again-cbn-panicked

I told friends the no cash deposit into a dorm account rule was a mere band aid on a festering sore, until we diversify our economy & are no longer 99% dependent on imported goods, the naira will continue to swing back & forth like a pendulum....