That the governor of the Central Bank of Nigeria (CBN) used the platform of the bank’s recent policy committee meeting to announce what should have been but an operational change in the working of the nation’s financial services space shows how limit-bound traditional monetary policy instruments have become. After almost 2 years of rising steadily, we can no longer make the case that inflation is transitory. Yet, the CBN’s monetary policy rate (MPR) long failed as a tool for bringing about price stability. Nor ― despite the macroeconomic authority’s best wishes ― has the MPR’s current low level helped to boost domestic investment by making retail money market rates cheaper. If anything, by helping hold down the cost to government of servicing the domestic component of the public debt, the monetary policy rate may merely have indulged the federal government’s bulimia for borrowing. Neither has the asymmetric cash reserve rate policy achieved much else besides discombobulating banks’ assets and liabilities committees.

Still, one ought not to make light of the central bank’s most recent policy pirouette. According to a report, last week, in the PremiumTimes, “The Central Bank of Nigeria says it has ended the sales of forex to Bureau de Change operators, saying the parallel market has become a conduit for illicit forex flows and graft.” The governor of the bank, reportedly “said it will also no longer process applications for BDC licences in the country”. The CBN will, instead, now route its weekly foreign exchange sales through what it calls deposit money banks (DMBs).

Notwithstanding the furore that this has generated amongst our talking-heads, at issue here is neither BDCs nor DMBs. For, in the end, these are only routes to market in our current foreign exchange trading system. In any market, even for currency, once supply of the good or service traded cannot meet demand, and the authorities insist on a price cap (as the CBN persists in doing in the foreign exchange market, and as was the case with production in the USSR), rationing, queues, and activities designed to game the system come into play. The main poser, then, from the CBN’s new policy position is this: All other things held constant (in this case demand implacably headed north and badly constrained supply) how does tweaking the supply chain affect prices? We, of course, assume that behind the policy contortions that the apex bank has been prone to of late is a residual concern with stable prices.

Is there a chance, therefore, that without first finding out why BDCs were prone to whatever infractions the CBN is punishing them for, the current focus on foreign exchange supply lines will be counter-productive? And this is before we proffer answers to a different question. What is to stop banks’ treasurers eventually going down the BDC route? Operators of BDCs were cheating. They, apparently took cheap dollars from the CBN and sold on for a considerable margin at the black market. Incensed, the regulator reroutes its supply through banks. The fundamentals remain unchanged. The central bank, with increasingly restricted access to foreign exchange remains the sole supplier across its many windows.

The supply of foreign exchange continues to undershoot demand. The regulator will not lift the price cap in the market. All who have access at the official rate may profitably sell at the black market. Under these circumstances, why should selling through DMBs be more efficient than selling through BDCs? Why would banks not do exactly what the BDCs were doing ― especially when, they, unlike the BDCs have myriad transactions to mask this with? It is easy to say we have been here before, and one refers to the many times the central bank has in the past kicked banks out of the foreign exchange markets for “round-tripping”. Renaissance Capital, a top emerging and frontier markets focused investment bank, strengthens this feeling of déjà vu when it reminds us that “In January 2016, when the central bank last stopped FX sales to BDCs , the naira depreciated by 60% against the US dollar, in the parallel market, over the subsequent 12 months”.

Last week, as the apex bank tried to embed the new policy, the CBN governor announced the release of US$200m to banks. Ask bankers what portion of their respective customers’ demand this is? You would find that it barely scratches the surface of demand from any one of the top-4 banks in the country.

Let us leave bankers out of it for the moment. What portion of Nigeria’s ballooning import bill is this US$200m? Move quickly past even this question, and there is a further dilemma. Let us suppose that somehow the CBN releases this amount to the banks 4 times a month. At about US$1bn every month, that means we would, on current form (low levels of crude oil sales, OPEC+ quota and all, along with higher prices that have not made much of an impression on the balance on the nation’s gross external reserves) have wiped out the balance on our gross external reserves in 30 months.

Arguably the biggest of the questions raised by the new CBN policy is: Why do we insist on subsidising the access of a privileged cohort to official FX, who then invoice all their transactions with the rest of the economy at black market rates? Until we find a functional response to this question, it is fair to believe that as it was with the BDCs, so shall it be with the DMBs.


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