CBN explains foreign exchange restrictions

Faced with the huge challenge of coping with increasing demand for Foreign Exchange for imports, medical bills, school fees and ‘shopping’ abroad, among others, the Nigerian banking industry has adopted a lot of controls to conserve FX in their vaults and help manage the country’s dwindling Foreign Reserves. The latest is the restrictions on the use of naira debit/credit cards for transactions broad. In this interview, MOSES TULE, Director, Monetary Policy Department of the Central Bank of Nigeria (CBN) told a few journalists, including BusinessDay’s ONYINYE NWACHUKWU why the apex bank strongly supports those new restrictions and why FX controls had become critical.

Banks have placed restrictions on the use of naira cards for transactions abroad. What is the CBN’s position on this?
Nigeria’s dwindling foreign reserves today can be likened to a river that is almost drying with no more water and the fishermen unable to fish freely like before.

Foreign exchange, under the condition the country has found itself has become a seasonal commodity in the sense that the seasonality or availability now depends on the movement in the price of oil. If the oil prices are high, then we build reserves and if they are low, then we have no reserves.

We are in a crisis for an economy as big as Nigeria and Africa’s biggest economy at that. We should by now have diversified the economy to a point where developments in oil prices no longer will matter to the macro economy, but unfortunately, that has not been the case and that explains the kinds of decisions that come at times.

The limitations on the use of either naira debit or credit card outside the country was not placed by the Central Bank.They were restrictions placed by the Deposit Money Banks because they have to settle whatever consumption so 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 crystalize on their balance sheets.

But looking at it holistically, does the Central Bank sympathize with the conditions that Nigerians find themselves not being able to use their debit cards foreign transactions, yes, the banks certainly does. But can the Central Bank stop it at the point we are, the obvious answer is no, it cannot stop what the banks are doing right now and the reason is very obvious and I will explain.

When I was young, I used to leave in an area where there was no water so we depended on well water. During the rains, the well was so good that even neighbours could come and take water to go drink. But once the dry season comes the well dries up, so we try to limit the use and we place some restrictions and at some point, we close it and restrict it for members of the family.

That is exactly what we are experiencing. So now, 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 is for the importation of petroleum products until such a time that we have our refineries fully operational and we no longer import fuel. Thirdly, is for the importation of raw materials.

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.

We would then go back to the point where the river is about to dry, if we see that the river that is a flow can dry, foreign exchange that is a stock, can also dry that is where we are today.

You have not really said of certainty the CBN position on what the DMBs are doing. Is the CBN currently in support of the latest decision by the banks?

The Central Bank is totally in agreement with what the banks are doing because they are under pressure. Your liabilities are going to crystalize on their balance sheets because their corresponding banks are going to hold them responsible to make the relevant settlements in foreign currencies and that is going to strain our reserves.

If a river dries, what is the detriment, on shopping or what? We have three priority areas which I have mentioned. So we cannot substitute them with shopping obligations.

We were recently told that the banks were awash with ‘dollar cash”. But suddenly we are hearing that these monies are longer there, we are wondering where these monies have gone to?

Ans:Let me explain this. First, whatever decisions banks take with respect to allowing their customers use debit cards are strictly business decisions because they are looking at their balance sheets and at their capacity to settle with their corresponding banks the obligations that will crystalize into their balance sheets if they open themselves so much to settling the demands of the people that are out their shopping in foreign currencies and using their debit cards for one thing or the other.

We do understand that it may not be all the demands that will be for shopping but most of it is for that purpose. But by the time that even the river is begging for rain so that it can have water, when even the rains dry, you cannot blame the human beings that are drinking the water but because it has dried.

We are seeing that the reserves are no longer there, so whatever we have, we have to essentially keep for purposes that will keep the economy running.

And we need to understand it in this way. We have to produce for export, we cannot continue to depend on only on the export of oil.

Coming back to your question, when banks say they had so much dollars in their vaults, and they were not going to accept dollar deposits into accounts. A prelude to that was that some people were simply substituting naira for dollar.

With that level of currency substitution, we were getting to a point where the naira seized to be the legal tender for this country. But we are proud Nigerians and we are proud of our currency. The CBN and the Deposit Money Banks are licenced under the Nigerian law, the naira is the currency to hold.

So they saw people creating artificial demand for substituting naira in their savings with dollars which was piling pressure on external reserves at a point when oil prices were going down.

They had looked in their tills and had seen stock piles of dollar deposits in there. And more and more were coming. And they said, look, since there are restrictions by the Central Bank that we cannot even transfer these monies outside the country, we do not see any reason why we would continue to accept more.

These are deposits or savings in individual accounts, and banks’ decision on their customers are strictly business decisions and not that of the regulator. So it was a business decision of the banks and I am sure that the Banks have not told you that you do not have access to your foreign exchange. But what they are saying is that if you deposited cash, you can ask for cash. If the proceeds or deposits in your account are by way of transfers and you what to carry out a transaction, you can only transfer.

There were a few more restrictions that were placed by the CBN when we did say that because of the substitution that was taking place, especially in the exports proceeds and domiciliary accounts, where people will bring in export proceeds and would want to use those accounts for other purpose other than the importation of raw materials, we have placed restrictions on that. We said look, if you benefitted from cheap foreign exchange, say in imported raw materials by using the official channel, you brought in your proceeds but now want to go and draw cash so that you can sell in the parallel market, we will not allow you, because first, you generated the proceeds by accessing the official window which was much cheaper.

These were some of the reasons why we placed those restrictions on even people that have export proceeds domiciliary account. But they can have access to the proceeds if they want to import raw materials.

If the FX is still drying and yet there is this policy on banks not accepting dollar deposits. People are asking that why not the CBN lift those restrictions so that there would more inflows and the market has more liquidity?

Look, the currency of use in this country is the naira and not the dollar and that is it. You cannot expect to be carrying out dollar transactions over the counter in an economy whose currency is not dollar denominated. It is just like going to some countries in the Europe and you want to make dollar or yen or Renminbi deposits across the counter, it is unacceptable.

We must learn to respect the system and the laws that govern our system. The law says your deposits are in naira. If you have earned foreign exchange from any of your investments outside the country, your export domiciliary account can receive foreign deposits into it. If you have earned foreign currency, they can be deposited in that account.

I do not see you carrying out a transaction and earning foreign currency within Nigeria, you will earn naira. If you had a business that earned foreign currency, it will come into your domiciliary account by way of a transfer, not by cash. If you have cash to deposit in your domiciliary account, there are only two ways about it. It is either you patronise the legal black market, or you are doing some short changing in the country and that is against the law.

The Central Bank will not sit down and watch people using the legitimate channels of the financial system to promote illegality.

How long do you see these restrictions lasting?

As soon as we begin to build up reserves. It is just like during the rainy season that the fishermen do not have to bother about water because the river is always full. But as soon as the dry season comes, you can even walk into the river with a shovel and dig out sand. So that is exactly what it is. The moment we begin to build reserves, we expect that, just as these restrictions were not there in recent past when everything was fine, most of the restrictions would be lifted.

But for now, every hand needs to be on deck. We need to earn foreign exchange as a country. You can improve your business processes inorder to produce and earn foreign exchange. That is what the country is calling on patriotic Nigerian businessmen now to do.

We notice that there some hotels and big shops that still request for foreign exchange payments even though it is illegal like you have pointed out

What you do is that you refuse to make dollar payment and if they refuse, report. There are laws governing this country and nobody who has a licence to do legitimate business in this country will deliberately go out to break the laws of the country. That is why we have the law enforcement agents that are paid with tax payers’ money. We have the Consumer Protection Council and the CBN, make your report known. If you have a problem with your bank, tell them to address it. If you have your facts and you bank refuses to address it, write officially to the Consumer a Protection Council, CBN and it will be taken up.

Is the CBN restricting all usage of foreign exchange in the country?

The CBN has only placed some restrictions; We are not saying that if you have earned your dollar, you will not use it.

There are however certain hotels that are authorized dealers, so they are allowed to collect dollars because they have the licences. Certain businesses are allowed by the nature of what they do to collect dollars and again, the use of Form A to make transfers is very possible for your outbound money transfers. These are the channels that the Central bank has created to ease payments like school fees, PTA, BTA. You want to transfer money to your child that is in school, you can still use your dollar account to make such transfers.

Travelex is there which is a Nigerian registered Bureau De Change and is much cheaper than most of the other BDCs. But because they will document the transactions, many people do not to use them. We have people who do not what to make documentations and flout rules with the BDCs helping them.

This takes us to the point that every country, you must get to a point where you begin to be patriotic.

An American that is working in Nigeria pays his full taxes to the United States, there are laws that compel him to do so, whatever income he earns here, that is patriotism.

We must get to a point where and we expect that our businessmen who are beneficiaries of this system when the going was good should understand and come to the aid of this country. Let us come together, produce for export and turn the fortunes of the country around. The potentials are still there, I strongly believe that we will get to where we want to get to as a country, greater and stronger.

How soon is the CBN going to stop funding the BDCs
Ans: If you read the budget speech of the President, there was one statement where he said, “We must make hard choices in the course of 2016.

It is a budget that is supposed to open up the great potential of this country if implemented. We definitely have to make those very hard choices. And this is not because he wants to hurt anybody, but must be made not at the detriment of the generality of the Nigerians. That, I think is very comforting because those choices would be for good of the entire economy. But at the right time, the Central Bank will take the appropriate decisions that will strengthen the foreign exchange market.

Why is it difficult for the CBN to rein in the activities of the BDCs since they appear to be sabotaging the system?

Ans: You have asked very important question but I want you to understand that even when the CBN must get hard on the BDCs, at the same time, it must also consider the fact that they employ so many people, whether we like it or not.

We do not want to take decisions that will increase the unemployment situation in the country.

It is not that as if we are oblivious of some of the things they are doing. You must have seen how we continue to place sanctions on erring BDCs. We will continue to fine-tune the regulatory mechanism around BDCs, but we should not take decisions that will worsen the unemployment situation. So we try to weigh the fundamentals and gains and losses of taking any decision.

We are looking at the entire regime of the BDC operations and policy regime around it and the regulatory framework. We are fine tuning it and we will continue. I assure you that we are definitely going to have better BDCs, we are beginning to see the example with the TRAVELEX.

Are we moving at devaluation, especially considering the president’s budget speech which has also elicited some projections by analysts that this is where we are headed.

This issue of devaluation has come up severally. When an army General sends his troops to the war front, no matter how good a professor of military strategy is, he cannot go and tell the general how to expose his personnel.

The General is the man in the field, he knows where the battle is. He has all his maps, his strategy that will give him victory. No matter how knowledgeable therefore, the professor is, he cannot advise him in the battle front when to take the next decision.

If that is case between the General and the professor of military strategy, I then begin to wonder when for instance, a taxi driver begins to tell the army General that look, that way you are deploying your soldiers, you are going to face fire. People should respect the situation and what has been given to them. If you have an advise to give, do so. But know that no Central bank takes policy decisions just on account of the analysis done on the paper and the television.

If the dollar is going to be devalued today or appreciated tomorrow, the fed will not take decisions based on the analysis on the paper because on the same day you are having analysis telling you that you need to depreciate, there is another one telling you otherwise.

So, often, policy makers weigh what the fundamentals for the economy are.

The Central bank is holistically looking at the issues surrounding the exchange rate and as we have consistently said, we will not hesitate to take the right decisions, that, in my opinion are in the best interest of this economy and realise the goals of government as enunciated in the 2016 budget.

There is a policy direction which government has given in the 2016 budget, and every central bank works with the policy direction of government, we will not work outside that framework.