Nigerian businesses and manufacturers may soon get some relief as the Central Bank of Nigeria (CBN) moves to reform and restore liquidity and two-way quotes to the autonomous foreign exchange (FX) markets which have been gummed up for more than a year.
Sources tell BusinessDay that the need to activate provisions of Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 2004 or FEA Act is playing a big role in the CBN’s move to reform the FX market, which even the apex regulator realises is not functioning optimally.
In a post on the facebook account of Vice President Yemi Osinbajo, the attainment of “an appropriate foreign exchange regime” was listed as one of key short to medium term policy objectives of President Muhammadu Buhari’s administration.
CBN Governor, Godwin Emefiele, said in a statement at the end of the most recent policy committee meeting held last month, “the MPC took note of the level of activity in the autonomous foreign exchange market, as well as the rising demand in the interbank market…the committee charged the bank to speed up reforms of the foreign exchange market to improve certainty and eliminate noise and opportunities for arbitrage.”
Nigeria has pegged the official rate of the naira at N197- N199 per dollar, since March 2015 to stem the currency’s slide, amid a rout in oil prices.
The policy is widely seen to have worsened the shortage of foreign-exchange and lack of dollar inflows and has been criticised by investors and businesses.
The FEA 2004 Act by virtue of the provision of its section 9 specifically states that: “the rate at which each transaction in the market is to be executed shall be at the rate MUTUALLY AGREED between the APPLICANT PURCHASER and the AUTHORISED DEALER or AUTHORISED BUYER concerned.”
Sources however, say although the apex bank has never issued any circular abolishing the willing seller, willing buyer principle enshrined in the FEA of 2004, the foreign exchange quoted by banks today to Authorised buyers such as International Oil Companies (IOCs), importers, and hotels, has remained consistent at the N199/$ regardless of the transaction amount because dealers fear they could be sanctioned heavily by the regulator.
This is seen to have discouraged liquidity and trading in the autonomous FX market.
As a result, only about $10 million is currently sold daily in the official FX markets in Nigeria, according to data from Standard Chartered Bank.
This is too low to meet legitimate business demand for FX in Africa’s largest economy and compares to South Africa’s daily spot FX market trading of between $2bn and $4bn.
“It is not the traditional role of the CBN to determine exchange rates in the market. Its role is simply to guide and control monetary policies. This is the traditional role of the CBN anywhere in the world,” Olisa Agbakoba, a Senior Advocate of Nigeria (SAN) said in response to BusinessDay questions.
“It is not its place to interfere with the market. But let us even assume that it is (as we are not known as a country that thrives on the Rule of law), and the CBN is aware that it has no legal powers to do what it is doing. Commercially, should it even be doing this? No, because it makes no sense. The foreign exchange market is now determined narrowly by the CBN to mean the Foreign exchange reserves that Nigeria has.
“This is totally wrong. The foreign exchange market includes everybody: you, me and everyone else.”
Nigeria’s FX reserves dropped 33 percent to $27.6 billion between January 2014 and April 2016
The apex regulator’s monthly dollar inflows from oil, taxes and royalties, fell to less than $1 billion dollars in January, falling from a peak of about $3.2 billion in data from the CBN show.
The naira has hit a record low of N320 to the dollar on the parallel market, as importers desperate to meet their obligations scramble for dollars.
“Exporters and investors are holding on to foreign currency, as no one would sell at the rate the government is setting, while the government does not have the reserves to keep the exchange rate at its official level in the market”, Lamido Sanusi CBN governor from 2009 to 2014, said in a recent interview.
Sources say one direction the CBN could take to return liquidity and improve the functioning of the FX market, would be to authorise a second-tier FX market to ease the current dollar crunch.
A second-tier FX market has been tried in Nigeria in the past in the 1980’s.
The second-tier foreign exchange market (SFEM) had three key components: CBN organised tender sessions, interbank dealings and OTC dealings between banks and their customers.
The SFEM system was relatively managed and required import documentation, but it ensured more market-determined exchange rate adjustment and a USD-NGN divergence from the Tier I exchange rate.
“A second-tier FX market may smooth the depletion of FX reserves, but it will most likely not prevent naira depreciation if oil prices remain so low,” Samir Gadio Head of Africa Strategy and FICC Research at Standard Chartered Bank, said in response to BusinessDay questions.
“From an offshore investor standpoint, the key question is whether the non deliverable forwards (NDF) fixing will change.”
Though the FEA 2004 act empowers the CBN to issue from time to time guidelines to regulate the procedures for transactions, monitor and supervise the market, the FEA 2004 clearly stipulated that the willing buyer and willing seller principle will rule the market.
The FEA 2004 Act, vests in the APPLICANT PURCHASER (the person seeking to buy foreign currency at the Autonomous Market) and the AUTHORISED DEALER OR BUYER the power to agree on a mutual rate at which their transaction is to be executed.
Authorised Dealer is defined as any bank licensed under the Banks and Other Financial Institutions Act and such other specialised banks issued with license to deal in foreign exchange while Authorised Buyer is defined as a Bureau de Change, hotel or other corporate body appointed as such by the CBN under the provisions of the FEA Act.
The FEA 2004 Act also overrides the CBN’s Act 2007 as section 37 (2) of the Act specifically states that if provisions of any other law including the provisions of the enactments specified in Section 37 (1) of the FEA 2004 (the CBN Act is one of the enactments specified in subsection 1) are inconsistent with the provisions of the FEA 2004, the provisions of the FEA 2004 shall prevail and the provisions of that other law shall, to the extent of its inconsistency be void.
“There’s no doubt about the legal issues and implications, but we have to approach it commercially,” said Agbakoba, the Senior Advocate of Nigeria (SAN).
“The only way to go is for the CBN to make the buying and selling of FOREX flexible. Bottom-line, the CBN has defined the market too narrowly.”
PATRICK ATUANYA & Theodora Kio-Lawson
