In an attempt to manage the downward slide of the Naira, the Central Bank of Nigeria (CBN) began to introduce many new foreign exchange policies from early 2015. Some of the policies introduced by the CBN since then, include significant reduction of the amount of forex transaction on ATM cards, be it through cash withdrawals or electronic payments. The CBN also placed an embargo on export proceeds, insisting that such proceeds must not only return to the country but also be sold back to commercial banks at official rate. By the middle of the year, the apex bank again decided to Prohibit 41 items from access to forex from official CBN window.
In as much as one would expect the CBN to always come up with policies that would have positive effects on the Nigerian economy, the reality on ground indicates something entirely different. Mainly due to the fact that most CBN’s policies especially under the current leadership have been more of knee jerk reactions rather than well thought through decisions. So more often than not we are usually left with a mix bag of some very good and very bad policies, taking the country two steps forward and four backwards.
When the announcement of prohibition of 41 items from official forex window became public, majority of the analyst reviews agreed that it was in the interest of local manufacturing, and that if sustained, would engender the growth of Nigeria’s local manufacturing sector in no distant future, as major erstwhile importers of any of the 41 restricted goods will be forced to invest in local production to stay in business. Even though implementation strategy could have been better, it is generally regarded as a reasonable policy that could assist local production.
However, most financial sector analysts and stakeholders are at a loss over the CBN’s decision to retain the very bizarre policy, denying non-oil exporters access to their hard earned export forex proceeds. The CBN further directed that export proceeds be compulsory (compulsorily) sold to commercial banks at official prices. If the CBN has restricted certain goods from qualifying to bid for forex from official window, one then is left wondering what logic there is for the CBN to further deprive exporters of their export proceeds. In whose interest is the retention of this obnoxious policy? The nation or some rent -seeking institutions?
The latest figures from NEXIM and other trade agencies, indicates a very sharp decline in the volume of non-oil export for year 2015 compared to 2014. In this period the Naira has equally experienced great decline in the open market. This isn’t really so much of a surprise to most analyst and stakeholders. It was obvious back then, that if the CBN would sustain a policy of reducing goods qualified for official forex bids, it must go the extra mile to encourage forex inflows to the parallel market from other unofficial sources like non-oil export proceeds, diaspora remittances, foreign investments etc. This would have aided supply of forex to the open foreign exchange market, a market that had now come under very serious strain due to renewed demand. Instead, the Central Bank went on a restriction spree. Restricting transactions, on almost anything and everything that had to do with forex, whether through normal domiciliary or export proceeds account.
In order to have a clear understanding how this policy negatively affects non-oil export and the value of Naira, let’s look at it from this angle; non-oil exporters go through the challenges of doing business in Nigeria, to source for a commodity with the right quality at market rate, warehouse at market rate, sometimes proceed to add value to raw commodities at market rate, there after load and transport to port at market rate, also incur all inspection and port charges at market rates. In addition most exporters are also responsible for finding international buyer for their products (by the way none of these processes is easy in a country where the government and the commercial banks do virtually nothing to genuinely assist non-oil exporters). However, when exporters receive the reward of their hard work through forex payments, the CBN insist that these forex proceeds must be sold at official rates to commercial banks, who, in turn end up selling same inflow at prevailing market rates, making mega profits for doing absolutely nothing. If this is not a classic case of government backed rent seeking by commercial banks, then what is it?!
In the last one year, many small scale exporters, who together form a large group, have had to withdraw most of their investments on non-oil investments mainly due this export proceeds policy that was introduced back in February 2015. When the CBN leadership suddenly realised it was almost emptying the nation’s forex vault for political and other rent seeking interventions, this group of exporters were left with little or no option since one of the major attractions of the trade was no longer available. This is even more so when they realise the trade by itself without such incentive isn’t really profitable, considering all the uncertainties and challenges exporters face to complete transactions to the point of payment.
When this policy was introduced, industry stakeholders like Cashew-nut Exporters Association of Nigeria, Cocoa Exporters Association of Nigeria, and Chambers of Commerce etc. warned that it would negatively affect growth of non-oil export. Fast forward to about a year after, according to Godwin Emefiele, Governor of the CBN – represented by Mudashiru Olaitan, CBN’s Director of Development Finance – in a one-day conference on stimulating non-oil exports which held on Tuesday the 19th of January 2016 admitted that non-oil export revenues dropped from $10.53 billion in 2014 to $4.39 billion in 2015.
In case the real and present danger inherent in the above admission by the CBN governor is not clear enough, permit me to present the arithmetic in this manner: in the past one year, the nation lost about $6 billion worth of non-oil revenue that could have been used to provide some stability to the open forex market by exporters in a win-win situation due to the enactment of an unfavourable CBN policy. It is also interesting to note that in the same period that the nation lost as much as $6 billion of non-oil revenue, the commercial banks aided by one of their own, Godwin Emefiele, the CBN governor, were able to make a profit of at least about N80 billion based on a projection of an average of N20 profit on $4.39 billion export proceeds revenue for year 2015 (i.e N20 x $4.39 billion).
I am not insinuating that the embargo on export proceeds is the only issue responsible for the slump in Naira and non-oil exports. Of course there are many more, however it can be effectively argued that all other inhibiting factors like infrastructure, low credit approvals for non-oil exports by banks, commodity quality issues have always been there, but the nation never had this level of decline in the non-oil exports revenue on a year on year comparisons since almost a decade. The only issue that is new in the mix is the decision by the CBN to place embargo on export proceeds from around February 2015.
Even though the apex bank has recently lifted the restrictions on the operations of normal domiciliary accounts after President Muhammadu Buhari promised to discuss the issue with the CBN governor when same was brought to his attention during his presidential media chat, the embargo on export forex proceeds still remains in force despite the damage it is doing to the non-oil export sector and value of Naira. The only logical explanation for its retention, if any, can only be to favour very big and powerful cronies in the financial sector and not Nigeria as indicated earlier in my arithmetic analysis.
The resultant effect of the retention of this ill-advised policy is what we see today in the sharp decline of both non-oil export volume and Naira value. Just last week the CBN announced a ban on sale of forex to BDCs, advising them to source from autonomous windows and oil exporting companies. But pray, why didn’t the CBN by same pronouncement grant non-oil exporters the opportunity to sell their own hard earned forex proceeds to BDC’s or any other buyer they so wish to?
This gang up against struggling non-oil exporters under the guise of forex management is not justifiable and without any equity. If there will be any restriction on export proceeds, it should affect only non-oil exporters who either get financial support from their banks or those who gets forex for imports at official rates from the CBN. But to retain restriction even on proceeds of non-oil exporters, who do not enjoy any support from their banks through loans or access to forex at official rates, will do more harm than good to the growth of non-oil exports and stability of the Naira. It is simply retrogressive in nature. The earlier this embargo is lifted the better for the country’s non-oil export development.
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