FX Crisis and Need to Stop Scapegoating Banks

Festus Akanbi, in this report, captures the views of banking sector analysts who argue that the depletion of the foreign reserves should be blamed on the failure of the government to resolve the fallouts of the recent foreign exchange reforms and the voracious appetite of Nigerians for foreign goods and services instead of scapegoating Nigerian banks

For reasons that have continued to defy logic, Nigerian banks have been at the receiving end of the foreign exchange management fiasco which has sent the naira on a tailspin, especially in the current year.

Analysts said instead of shifting the blame of the current FX crisis on banks, the federal government should be bold to accept the blame for the policy somersaults.

According to an Abuja-based financial analyst, the current problem should be blamed on the decision of the federal government which finds it difficult to resolve the emerging crisis from the recent reforms.

The foreign exchange reforms have created some complexities that the government finds difficult to handle. “It’s obvious the CBN doesn’t have a clue on how to resolve this problem. Shifting the blame on banks is disingenuous,” the analyst argued.

On Friday, a dollar was traded at N1,524.83 at the official market while it went for N1,575 at the parallel market.

Interestingly, some social commentators, without any concrete proof had alleged that banks should be blamed for frittering the nation’s FX reserves and that unless the Central Bank of Nigeria beams its searchlight on the banking industry, Nigeria will not be able to stem the current drift in the value of the Naira, which is a direct fallout of the FX scarcity.

And in one of the desperate measures recently taken by the apex bank, it recently ordered banks to cut their foreign exchange exposure as the naira plunges further. The net open position limit of foreign currency assets and liabilities “should not exceed 20 per cent short or zero per cent long of shareholders’ funds unimpeded by losses,” the regulator had said in a statement.

Reliance on Imports Strains FX Reserves

However, some economic watchers insisted rather than making banks the fall guy, Nigerians’ taste for foreign goods and services should be blamed for the erosion of the foreign reserves and emasculation of the local currency.

They maintained that the growing taste for foreign education, goods, and services has significantly eroded Nigeria’s foreign exchange position over recent years. This is because with an increasing number of Nigerian students seeking education abroad, substantial amounts of foreign currency are being spent on tuition fees, accommodation, and living expenses in countries like the United States, the United Kingdom, and Canada. This outflow of foreign exchange puts pressure on Nigeria’s currency reserves. It exacerbates its balance of payments deficit, making it more challenging to maintain a stable exchange rate and finance essential imports.

Furthermore, the preference for imported goods and services over domestically produced alternatives has contributed to the depletion of Nigeria’s foreign exchange reserves. From luxury items to basic commodities, Nigeria’s reliance on imports strains its foreign currency reserves and undermines efforts to promote domestic industries and economic self-sufficiency. The continuous drain on foreign exchange reserves weakens Nigeria’s economic resilience. It exposes the country to external vulnerabilities, making it susceptible to fluctuations in global market conditions and exchange rate volatility.

They added that on the other hand, frequent foreign medical trips by government officials and private citizens have a substantial impact on Nigeria’s foreign exchange savings.

According to analysts, the significant outflow of funds to cover medical expenses abroad drains the country’s foreign exchange reserves, exacerbating the existing economic challenges. It is a fact that government officials and private citizens often seek medical treatment overseas due to concerns about the quality and availability of healthcare services domestically.

This reliance on foreign medical care not only depletes Nigeria’s foreign exchange reserves but also highlights systemic issues within the country’s healthcare infrastructure, calling for urgent reforms to improve accessibility, quality, and affordability of healthcare services within Nigeria.

Cardoso: Foreign Education, Health Services Gulped $40bn in 10 Years

Their argument was reinforced by this week’s revelation by the Governor of the Central Bank, Mr. Yemi Cardoso who put the total foreign exchange demand for education and healthcare by Nigerians at $40 billion.

According to him, the foreign exchange (FX) demand for education and healthcare in the past decade has significantly eroded the strength of the naira.

Analysts said rather than heaping the blame for the continuous erosion of the nation’s FX standing on banks, Nigerians should focus on the middle class, most of whom have their children studying overseas.

“As it is, you can hardly find a Nigerian home whose children are not in one foreign university or the other, with the attendant pressure on the forex market,” argued Mr. John Alonge, a Lagos-based financial analyst.

Alonge, however said banks cannot be totally exonerated from the blame in terms of the level of infractions levelled against some of the operators.

He pointed out that it is a fact that many of those with genuine FX request for BTA are denied and forced to approach the parallel market in some cases. However, he pointed out that such level of infractions is infinitesimal when compared with the impact of the appetite for foreign goods and services.

His position was corroborated by a Lagos banker, Mr. Stephen Ogunshola, who explained that as the number of Nigerian students abroad surges, so also does the rush for FX as parents resort to the black market given the challenge of going to the bank.

He said with the growing propensity of Nigerian rich men and members of the political class to take their health matters abroad with corresponding pressure on the forex market, the stage had long been set for the continuous depletion of the FX stock.

To corroborate this argument, Cardoso, in his presentation at the plenary of the House of Representatives, disclosed that between 2010 and 2020, foreign education expenses amounted to $28.65 billion while healthcare incurred $11.01 billion.

The apex bank governor had said, “mitigating a significant portion” of the FX demand “could have resulted in a considerably stronger naira.”

“Looking at the demand side of the exchange rate, it is important to note the growing number of Nigerian students studying abroad. In the 1980s and 1990s, the need for US dollars for their living expenses was minimal.

“However, recent data shows a significant change. According to UNESCO’s Institute of Statistics, the number of Nigerian students abroad increased from less than 15,000 in 1998 to over 71,000 in 2015.

“By 2018, this figure had reached 96,702 students, as per the World Bank. Another report projects the number of Nigerian students studying abroad to exceed 100,000 by 2022. Additionally, the UK’s higher education statistic agency noted a 64 per cent increase in Nigerian students studying in the country, rising from 13,020 in the 2019/2020 academic session to 21,305 by the 2020/2021 session.

“Given this data, it is crucial to highlight that between 2010 and 2020, foreign educational expenses amounted to a substantial $28.65 billion, according to the CBN publicly available balance of payment statistics.  “Similarly, medical treatment abroad has entered around $11 billion in costs during the same period. Consequently, over the past decade, foreign exchange demand for education and healthcare has totalled nearly $40 billion.

“Notably, this amount surpasses the total foreign exchange reserves of the CBN. Mitigating a significant portion of this demand could have resulted in a considerably stronger naira today.”

According to Cardoso, further breakdown shows that personal travel allowances accounted for a total of $58.7 billion during the same period, with the CBN disbursing $9.01 billion to Nigerians for personal foreign travel between January and September 2019.

To give credence to the narrative on the rise in appetite for imported goods and services, the CBN governor said the nation’s annual imports, which require dollars for payment, amounted to $16.65 billion in 1980, but by 2014, the figure rose to $67.05 billion, although it gradually decreased to $54.71 billion as of 2023.

Cardoso said food imports increased from $2.63 billion in 1980 to $14.84 billion in 2019.

In 1980, according to Cardoso, more than 75 per cent of the vehicles used in Nigeria were domestically produced by companies like Volkswagen in Lagos, and Peugeot in Kaduna, among others, however, presently, over 99 per cent of the cars driven are imported, necessitating dollar payments.

“Similarly, in 1980, the majority of the clothing worn was sourced from Nigerian textile mills in Funtua, Asaba, Kano, Lagos, and various other towns and cities. Today, nearly all the clothing worn is made from imported fabrics,” he said.

“Given the substantial demand for education, healthcare, professional services, personal travel, and similar needs, the exchange rate is bound to face ongoing pressure.

“From the aforementioned points, we can infer that the genuine issue impacting the exchange rate is the simultaneous decrease in the supply of, and increase in the demand for US dollars.”