CBN rejigs forex strategy to save Naira, reserves

The Central Bank of  Nigeria (CBN) and deposit money banks are now prioritising foreign exchange funding for three key items, including settlement of matured Letters of Credit, importation of petroleum products and raw materials.

This is part of a new strategy to curtail frivolous usage of foreign exchange, conserve the nation’s foreign reserves and preserve the naira.

The new decision comes at a time when Nigeria’s foreign reserves, now at a low of $29 billion have come under intense pressure as oil income shrinks by over 50 percent in the face of current all-time low soft oil prices- yet FX demand, mainly for school fees, medical bills and shopping abroad continue to soar.

President Buhari had acknowledged in his budget speech, the acute challenges many Nigerians face in accessing foreign exchange for the trading, importation of inputs; sophisticated equipment and spare parts, among others.
Buhari admitted that these were clearly due to the current inadequacies in the supply of foreign exchange to Nigerians who need it. He also indicated that the country would have to make tough choices to contain the economic crisis.

Speaking to the new policy direction, Moses Tule, the CBN’s Director, Monetary Policy, said the increasing FX demand in the face of incredibly low accruals to reserves is now making it extremely difficult for the banking system to meet excessive FX allocation for several other items.

Tule indicated that the new prioritisation of FX allocation would possibly subsist until the country can begin to earn enough foreign exchange and be able to rebuild its reserves.

“Our priorities for the allocation for the use of foreign exchange are, one, for the settlement of matured Letters of Credit that have been opened for importation. Second on our priority release is for the importation of petroleum products until such a time that we have our refineries are fully operational and we no longer import fuel.

“Thirdly, is for the importation of raw materials,” he told journalists in Abuja.

The clarifications given by Tule, seemingly explain the recent restrictions by banks on the use of the naira debit/credit cards to access foreign exchange or for transactions abroad.

“We have to realise that we no longer have sufficient foreign exchange like we used to and banks are under pressure because your liabilities are going to crystalise on their balance sheets because their corresponding banks are going to hold them responsible to make the relevant settlements in foreign currencies. That is going to strain our reserves,” Tule explained.

“Now, by the time we meet these three priority areas, given the level of current flow into the foreign reserves, you find that people who are using their debit cards abroad for things like shopping can never be on the priority list and that is where we are.”

Tule said the Central Bank did not initiate these new restrictions but firmly support the banks in this policy which, according to him would help conserve what is left of the nation’s reserves today.

His said, “The Central Bank is totally in agreement with the banks’ decisions because they are under pressure to meet those liabilities incurred by their customers when they use naira debit cards to make FX withdrawals or even make payments, which in turn put a serious strain on the nation’s reserves.

“But it did not come from us, they were restrictions placed by the deposit money banks because they have to settle whatever consumption you make with your debit card with their corresponding banks in foreign currency.
“And if the banks do not have the foreign currencies to do that, then you create a liability on them which will crystalise on their balance sheets.

He also observed that it was high time Nigerians realised that the dwindling oil prices have dealt a blow to the foreign reserves, with severe threats to the economy and as such, the banking industry can only now fund genuine demands for those prioritised items and can no longer afford to indiscriminate demands.

“We are seeing that the reserves are no longer there, so whatever we have, we have to use essentially for those purposes that will keep the economy running,” Tule noted.

He disclosed that the Central Bank is holistically looking at the issues surrounding the naira exchange rate and will not hesitate to take those right decisions in the best interest of the economy and realise the goals of government, as enunciated in the 2016 budget.