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CBN forex interventions and the economic brouhaha

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THE Nigerian economy, which has relied heavily on foreign exchange proceeds from crude oil sales for many years, is teetering on the edge of another recession. In 2016, when the economy slid into its first recession in 25 years on the back of the oil price slump that began in mid-2014, the country experienced a severe scarcity of forex and many businesses were hit hard. Forex reserves hit a low of $23.89 billion in October 2016, while the naira tumbled to an all-time low of 520 per dollar at the parallel market in February 2017.

Now, the economy is in doldrums again, and faces its worst recession in four decades, according to the World Bank projections. Before the COVID-19 pandemic triggered the collapse of oil prices, the country’s forex reserves had been on a downward trajectory for months, falling from a high of $45.18 billion in June 2019 to $38.59 billion in December 2019. The economy was fragile, with sluggish growth, low government revenues, rising debt profile and constrained fiscal space, among others. Today, the economic challenges have been exacerbated by the pandemic.

The scarcity of the dollar in the forex market and the economy is largely responsible for the recent depreciation of the naira. The Central Bank of Nigeria has devalued the currency twice since March this year, with the official rate now at N380 per dollar from around N306/$1 in December, while the parallel market rate has risen above N470/$1 from N360/$1.

As the monetary authority and lender of last resort, the CBN has continued to intervene in the forex market in recent years as part of efforts to boost liquidity and stabilise the exchange rate, but at the expense of the foreign reserves. The country’s forex reserves dipped further to $33.42 billion in April 2020. The CBN Governor, Godwin Emefiele, at the Monetary Policy Committee meeting in March, said the depletion in forex reserves was driven by forex sales to the Bureaux de Change and the investors’ and exporters’ forex window, as well as dwindling oil receipts. The International Monetary Fund said in April that a unified and more flexible exchange rate would be an important shock absorber, with the CBN forex interventions limited to smoothing large fluctuations in the exchange rate.

True. The multiple exchange rates in the country have created arbitrage opportunities, with the sale of forex to the BDCs by the CBN oiling the wheels. In August 2016, a former CBN Governor, Lamido Sanusi, expressed concern about how some people had become billionaires by cashing in on the wide premium between the official and parallel market exchange rates. “We have created our own billionaires since 2015 from foreign exchange subsidy. For instance, when the CBN was selling dollar at N197 and people were buying at N300, if I sit down in my garden and pick up my phone, I would have enough people to call in the industry to get $10 million at the official rate and sell at N300 and make a profit of over N1 billion,” he said.

In January 2016, when crude oil prices fell below $30 per barrel, the CBN was forced to discontinue selling forex directly to the BDCs amid concerns that they had become a conduit for illicit trade and financial flows. Emefiele noted that the BDC operators had abandoned the original objective of their establishment, which was to serve retail end-users who need $5,000 or less, and had become wholesale dealers in forex to the tune of millions of dollars per transaction. He said they used fake documentation to render weekly returns to the CBN, even as they sold the dollar at much higher rates than they bought it.

A cache of reports shows that official intervention is effective when used selectively and directed to short-run objectives. Describing Nigeria as the only country in the world where the central bank sells dollars directly to the BDCs, Emefiele said it was not surprising that since the CBN began to sell forex to the BDCs, the number of operators had risen from a mere 74 in 2005 to 2,786 as of January 2016. According to him, the CBN receives close to 150 new applications for the BDC licences every month. About seven months after the suspension of forex sales to the BDCs, the CBN permitted them to buy forex from international money transfer operators starting from July 2017. The CBN announced in March 2017 that it would commence twice-weekly forex sales to the BDCs from that April. Since then, the number of registered BDC operators has risen significantly. The latest data from the bank showed that there were 5,156 operators as of December 2019, up from 3,147 in January 2017.

Undoubtedly, the issues on which the CBN premised its decision to stop forex sales to the BDCs in 2016 are still very much with us. The rent-seeking operators that are only interested in widening margins and profits from the forex market must not be allowed to continue to have a field day. With the resumption of international flights on September 5, there will be an increase in forex demand. The CBN said that it would resume the sale of forex to the BDCs on September 7. The country’s forex reserves are expected to decline further as the CBN continues to intervene in the market to keep the exchange rate stable. The continuous depletion of the external reserves, which stood at $35.66 billion on August 26, could, according to analysts, Financial Derivatives Company, intensify the CBN’s forex rationing strategy, thus weakening the naira further.

The country’s economic growth rate turned negative in the second quarter of this year, with high unemployment, inflation and poverty. Foreign capital inflows into the country fell by $4.46 billion (78 per cent) to $1.29 billion in Q2 2020 from $5.85 billion in Q1, according to the National Bureau of Statistics. There is an urgent need for policy measures that will help to attract investment and capital into the country in order to boost forex reserves and the economy. This will help blunt the impact of the imminent recession.

Lady Decency
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