CBN’s Battle to Safeguard the Naira

Going by the present volatility in the macroeconomy, the Central Bank of Nigeria (CBN) cannot afford to allow saboteurs ruin its current efforts to maintain price stability as well as support the recovery of the economy, writes James Emejo

Undoubtedly, these are not the best of times for the Nigerian economy as key data in the second quarter of 2020 are really not encouraging.

The economy contracted by 6.10 per cent year-on-year in real terms in Q2 while foreign capital importation fell drastically by 78 per cent to $1.29 billion within the same period compared to $5.85 billion in Q1.

Yet, the lull in the global economy, largely occasioned by the impact of COVID-19 had further impacted on oil price, cutting government’s revenue and putting pressure on the country’s external reserves which stood at about $35.60 billion as at August 21.

Again, inflation had continued to be a threat to macroeconomic stability, peaking at 12.82 per cent in July while the Monetary Policy Rate remained at 12.50 per cent while unemployment rate had further increased to 27.1 per cent in Q2.

The official exchange rate is pegged at N375 to the US dollar as the apex bank had been working in recent times to allow the local currency find its real value by partly moving towards unifying the exchange rate across board, and following through the five-year roadmap of the CBN Governor, Mr.Godwin Emefiele, who had promised investor a more flexibility foreign exchange regime.

Nevertheless, the naira had continued to be under increasing attacks by forex manipulators, who engaged in various unwholesome practices including round tripping, over-invoicing as well as currency speculation- all of which undermine price stability and threaten the CBN’s mandate to stabilise prices.

Amidst all these and after several cautions which appeared to go unheeded, the CBN resolved to unfold its arm and tackling the situation head-on.

Last week, the apex bank took the markets and saboteurs by huge surprise when it launched a policy to arrest the age-long practice of over-invoicing, which unscrupulous businesses had used to cart away the country’s forex by directing banks and other authorised dealers to desist from opening Forms ‘M’ whose payment are routed through a buying company, agent, or other third parties.

The CBN further installed a product price verification mechanism, which is to help prevent overpricing or mispricing of imported goods and services, stressing that the decision was part of its continued efforts to ensure prudent use of the scarce foreign exchange resources and eliminate incidences of over-invoicing, transfer pricing, double handling charges and avoidable costs that are ultimately passed to the average Nigerian consumers.

The apex bank further vowed to unveil and prosecute “buying companies” that had been engaged in the unwholesome practice of forex manipulation.

It was stated that CBN Economic Intelligence Unit and Nigerian Financial Intelligence Unit (NFIU) was collaborating with Interpol and the Federal Bureau of Investigation (FBI) to uncover companies that had been engaged in the forex fraud.

According to information available to THISDAY, the forex fraud is perpetrated by these companies buying houses that are invoiced at inflated prices abroad, which they then offer to original equipment manufacturers (OEM). The companies then go abroad to cream off the forex often at 40 to 60 per cent of the transaction amount.

But it is not the first time the CBN had cautioned over the apparent abuse of the iconic Form “M” which is key for accessing foreign exchange for importation of goods.

The CBN had in June 2015 excluded importers of 41 goods and services from accessing foreign exchange at the Nigerian foreign exchange markets in order to encourage local production of these items.

The measures were taken to sustain foreign exchange market stability and ensure the efficient utilisation of foreign exchange as well as ensuring that optimum benefit is derived from goods and services imported into the country.

Nigerians had however tried to manipulate these restrictions which also apply to rice, toothpicks, tomato, fish palm oil, textile among others by tinkering with the Form M.

The CBN particularly warned all authorised dealers and the public of severe sanctions should they establish Forms M for importation of all NPK fertilisers and other prohibited items going forward adding that it would severely punish management and staff who may be responsible for such transactions.

Meanwhile, analysts have thrown their weight behind the latest clampdown by the apex financial regulatory institution over the introduction of measures to arrest the age-long activities of currency manipulation, stressing the need for price stability amidst fluctuation in reserves.

The analysts also encouraged the CBN to follow through with its sanctions if positive results must be achieved.

Speaking to THISDAY on the development, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said the CBN must ensure that the policy is followed by expansionary policies that will provide cheaper funds to the private sector to help stimulate the economy and boost growth.

He said: “Well, certainly, it’s a good move by CBN and even well overdue to be honest. In the past, the Form M has been abused by allowing companies to access cheaper funds from CBN at official rate and round tripping the funds to the parallel market thereby making a spread.

“This was done by over inflating prices of imported goods. This ultimately gets passed onto the consumer and creates cost-push inflation without adequate mechanisms to control and verify prices of imported goods.

“Now that our foreign reserves are under severe pressure, we certainly need to block all loopholes that allow for a more stable currency.”

Also commenting on CBN’s new policy regime, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, described the new forex policy regime as a “very strategic move that will reduce corruption in the foreign exchange market.”

He said: “The move will, on the long run, shore up the value of Naira which has been eroding rapidly since the beginning of this year. The central bank is getting more creative in addressing the foreign exchange depreciation problem with this policy.

“Many foreign exchange racketeers are certainly going to run out of business soon and dollar will be more available in the market thus forcing down the price of US dollar in Nigeria. This will promote foreign trade and improve the capacity utilisation in the manufacturing sector and other real sectors using foreign exchange for their businesses.”

On his part, Professor of Finance and Capital Markets at Nasarawa State University, Prof. Uche Uwaleke, while commending the initiative, however pointed out that the real challenge for the CBN is how to ensure that these laudable measures are not circumvented thereby defeating the purpose for which they were put in place.

He said the CBN should be ready to apply sanctions to serve as deterrent, noting that the rule for export proceeds repatriation had been in the CBN books before now but would appear to be observed in the breach by some exporters.

According to the former Imo state commissioner for finance, this is the “time for the CBN to wield the big stick, not mere slap on the wrist, on any DMB that flouts the Form M order regarding third parties.”

He said: “I have not stopped wondering where people who hawk forex in the black market get their hard currencies. The CBN should device means of checking round tripping to ensure that the banks are not diverting forex to the parallel market.

Uwaleke said: “It goes without saying that the economy is going through challenging times as a result of the decline in crude oil price made worse by COVID-19.

“To provide a context for the CBN’s recent measures regarding forex, it is pertinent to realise that the Q2 negative growth in real GDP, high inflation rate, increase in inflation and downturn in virtually all macro indicators are all partly attributed to scarcity of forex following collapse in oil price since oil revenue accounts for over 90 per cent of our forex receipts.

“This precarious supply situation is exacerbated by spurious demand for forex, activities of speculators and sharp practices. So, the CBN is faced with a double whammy sort of situation.”

He said part of the sharp practices which exerted pressure in the forex market is the over-invoicing of products imported into the country due to the activities of middle men.

According to the erudite professor, requiring banks to raise Form M only in favour of a supplier as opposed to routing payments for imports through agents will go a long way in reducing the pressure in the forex market especially if the product price verification mechanism the CBN is putting in place is effectively implemented.

He added that “since inflated prices of imports are ultimately passed on to the consumer, I expect that this measure will also reduce imported inflation.

“By the same token, the directive by the CBN to exporters to ensure that all export proceeds are repatriated should boost forex supply if complied with.”

Furthermore, economist and former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, said the apex bank should indeed pronounce sanctions on both the customers and their local commercial banks as this will deter them from opening Form M in agents or middlemen’s names.

He said: “This has always remained an unwholesome practice which has been in our system.

“Unfortunately, it is not easy for CBN to identify the companies abroad that are genuinely the actual exporters of these goods. Thorough checks can still be done and should be done by commercial banks opening these Firm M on behalf of their customers.

“Continuous practice will always create avenue for laundering of money thereby putting pressure on our foreign reserve.”