CBN, FX and economic growth  

 This may not be the best of times for the Central Bank of Nigeria (CBN) following the loss of over 70 percent revenue as a result of the crash in the price of crude oil on which the country depends for over 90 percent of its foreign exchange earnings. The current crash in oil price to less than $28 per barrel has also significantly reduced the Federal Government’s take from the profits of oil and gas companies this year, raising further questions about the viability of the 2016 budget.

Godwin Emefiele, CBN governor, said recently that the drop in crude prices, from a peak of $114/barrel in July 2014 to as low as $33/barrel in January 2016, has put the country’s reserves under intense pressure from speculative attacks, round-tripping and front-loading activities by actors in the FX market.

By its recent action of removing the restriction on foreign currency cash deposits by customers into their domiciliary accounts, CBN has provided a platform for Deposit Money Banks (DMBs) to re-engage their customers with FX with the aim of mopping up excess FX cash outside the banking system for effective monetary policy operations. Also, the stoppage of supply of forex to Bureau de Change (BDC) operators is expected to further ensure close supervision by the regulatory bank.

Emefiele, in justifying the recent reviews, said the activities of the BDCs had been in total violation of FX rules and that the operators had abandoned the original objective of their establishment, which was to serve retail end users who need $5,000 or less. Instead, they had become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction and thereafter used fake documentations like passport numbers, BVNs, boarding passes, and flight tickets to render weekly returns to the CBN.

The CBN governor further said the apex bank was only left with the option of withdrawing its funding since it was obviously finding it difficult to effectively oversee the activities of the over 2,768 BDCs operating in Nigeria today. He also noted that the last the country had oil prices at about $50 per barrel for an extended period of time was in 2005, with an average import bill of N148.3 billion per month. However, the current average import bill for the first nine months of 2015, for instance, was N917.6 billion per month even with the current less than $30 per barrel price.

In the face of this, the CBN governor has consistently called for the diversification of the economy and banning of products that can be produced locally to enable increased accretion of the nation’s reserves. However, with the forceful depletion of the Excess Crude Account and the subsequent drawdown of the foreign reserves, Nigeria is now facing the reality of a low foreign reserve and strong appetite for importation of virtually every goods and services.

Nigeria’s inability to turn its potential productive capacity into earning productive capacity has led to the use of its precious reserves to support importation of locally available items, which in itself is a critical factor in the unemployment crisis the economy faces. Given this difficult scenario, the CBN had no choice but to prioritise the allocation of FX to various groups, goods and services. This is a right policy that needs to be supported by all Nigerians. Everyone must be encouraged to “make money, not trade money”.

It is instructive to note that if Nigeria does not apply the brakes as CBN has done through its recent policy enactments, we shall all wake up one day to find that we are no longer able to import critical components for economic growth and development. Also, Letters of Credit will dry up very fast because no foreign financial institution will be willing to risk its investable fund in an economy without buoyant foreign reserves.

We commend the Senate which, after its meeting with Emefiele last week, expressed support for the foreign exchange policies of the apex bank. According to the senators, these policies are mostly geared towards increasing local production, creating jobs, safeguarding the nation’s commonwealth and expanding economic opportunities and growth. This is the path we must tread to rescue our economy from the brinks.