Foreign Exchange Market Nigeria Dollar To Naira

Pros and Cons of CBN’s Decision To Stop Selling Forex To Banks

Last Updated on February 14, 2022 by InfomediaNG

On Thursday, February 10, 2022, the governor of the Central Bank of Nigeria (CBN) disclosed that the apex bank would stop selling forex to banks.

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The new FX policy, according to Godwin Emefiele, would begin before the end of 2022, calling on the Deposit Money Banks (DMBs) to begin to source forex to meet their obligations.

Recalled, in July 2021 CBN stopped the sales of forex to Bureau De Change (BDC), if such policy is implemented on banks, the effect will be devastating. Though it will also come with some benefits.

He said:

“Before or latest by the end of this year, (DMBs) will not come to the CBN for foreign exchange again. They should go and generate their export proceeds, fund people who want to generate non-oil export proceeds, when the proceeds come we will fund them at five per cent for you, the proceeds will earn rebates, that is how we can help you.”

Source: TheCable.ng

Downside:

For the bankers’ bank to wake up and declare that it would stop the sales of forex to banks, it’s expected that the apex bank must have weighed the effects such impromptu and huge economic policy would have on the seemingly crumbling Nigerian economy.

So what are the downsides of this decision:

CBN May Completely Lose Its Forex Regulatory Role

Even when the CBN was selling FX to banks, there was no unified exchange rate in the banking industry. Bank A may sell US dollars at NGN480 while bank B sells at NGN490 per US dollar.

Though, the CBN rate has been described as the most deceitful since President Muhammadu Buhari assumed office in 2015.

The proposed policy, if implemented, is going to be totally strange to the banks who have depended on the apex bank for decades to source forex.

So what exactly would be the situation of FX market when the banks are forced to source FX. The first question that comes to mind is: Will the banks be selling at the CBN rate?

Uncertainties of the Forex Market

How exactly does the CBN want to build confidence in foreign investors, those that would bring in the forex when the apex bank is used to taking fire brigade policy?

Unstable policies and uncertainties around foreign exchange will definitely scare investors. CBN is not sincere about some of its policies around foreign exchange and such inconsistencies will erode the confidence of investors.

Banks’ Desperation

The banks, no doubt, are going to seek all means whether by crooks or true legal means to source forex to meet some of its financial obligations in the FX market.

For instance, some content creators who are Google Adsense Publishers are already nursing fears that their foreign earnings that are mostly in US Dollar and Pounds Sterling might be forcefully be converted to naira (using the low rate) in desperation of the banks to source forex.

Inflation

An importing economy like Nigeria will be disrupted by a “strange FX policy”. There will be shocks in all facets of the exchange rate and effects will be felt on the goods and services that are imported into the country.

The effect will be felt by the final consumers who are mostly the average Nigerians who depend on imported goods for their survival.

Analysts believe that due consideration should be taken before implementing such policies so as to avoid “profound macroeconomic shocks” that will follow its implementation.

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Forex Scarcity

At the time of publication, there is forex rationing even when banks are able to source FX from the CBN. As we write, students who apply for forex to settle foreign school fees wait for days to be funded because of rationing.

So, how would the situation turn when the CBN stops selling forex to the bank?

The proposed FX policy will worsen the current forex scarcity and drag Nigeria into another phase of harsh economic conditions.

Difficulty in Accessing Forex

Some time ago, a colleague said he was unable to withdraw his publisher’s funds because of the scarcity of forex in banks. The situation would become worst when the proposed FX policy becomes effective.

Access to forex will be very difficult.

Way forward:

There are two ways the Emefiele-led apex bank can mitigate the advert effect of the obstruction in the forex supply to the banks

One, instead of implementing the proposed policy when Nigeria’s economy is yet to recover from the pandemic shock, it should come up with a policy that will strengthen monitoring and supervision to ensure that the infractions by the banks in the FX market are drastically reduced.

Two, the apex bank should allow all inflows to feed directly into the Investors and Exporters window at a market reflective rate. This way, the disruptions will be minimal.

Benefits of The Policy

The proposed decision of the CBN to stop forex sales to banks will come with gains: to the banking sector and Nigeria’s foreign reserves.

Over the years, Nigeria’s apex bank has over pampered the Deposit Money Banks in the foreign exchange even when there had been accusations that banks are “official” black marketers of forex

It’s time for the bank to be fully get involved in the forex market instead of waiting on handouts from the CBN.

Initially, the naira is going to depreciate due to the shock, but would eventually recover as supply would begin to increase to meet demand.

Also, the policy if adequately implemented by the CBN without preferential treatment of some banks, will boost Nigeria’s reserves through proceeds from Nigeria’s non-oil exports.

CBN’s Solutions:

“When those export proceeds come, we will fund them at 5% for you and they will earn rebait. Then you can sell those proceeds to your customers that want 100 million dollars. But to say you will continue to come to the Central Bank to give you dollars, we will stop it. 

“Nigeria cannot continue to depend on FX earnings to fund its import obligations from revenue coming from earnings from products where we cannot determine both price and quantity.’’ 

According to Radio Nigeria

The policy will “ginger” banks to wake up from their slumber and get to work and engage exporters.

And of course, it doesn’t look like the CBN is going to hand off from FX, for instance, the banks might be able to access a portion of their forex demands from the CBN if they could provide impressive exports promotion records.

“Or maybe if they are lucky, if the bank approaches us for forex, if we see their exports records, we will give them five or 10 per cent of that request,” Emefiele noted

Recap:

The decision to stop the selling forex to banks means that the banks will have to source FX through all available means when the proposal becomes effective before the end of 2022

In short term, the shocks will be huge. In the long term, it will boost Nigeria’s foreign reserves, but for this to be achieved, the apex has to be consistent in policies instead of its fire brigade approach to solving problems surrounding the forex market.

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