Otunba Femi Pedro, banker, economist , former Managing Director of First Atlantic Bank (FinBank) Plc. He is also former Deputy Governor of Lagos State. Here, he examines the assault against the Naira, which has left it nearly impotent.
The Nigerian Naira – our national currency – is the only legal tender and means of exchange. In all its aesthetic glory, it is also meant to be a symbol of our national pride, our economic prosperity and our financial sovereignty. In reality however, it has been a national embarrassment.
Over the last decade, our currency has been battered and assaulted by speculators, rent-seekers, fraudulent importers, corrupt government officials and rogue bankers. There is clearly enough blame to go around, but a chunk of the blame has to lie firmly on the doorsteps of the Central Bank of Nigeria (CBN) – the institution that is legally empowered to be the nation’s monetary policy manager and the custodian of our Naira and foreign currency reserves.
So what exactly is wrong with our currency? Well, for starters, its value has been dropping like scattered raindrops from the sky. People have lost confidence in the currency, and foreign investors neither have any respect nor regard for the Naira. Even within our growing economy, the Naira has itself become a second-rate currency as a means of exchange and a measure of value. It continues to defer to the US Dollar and, to a lesser extent, the Euro and the British Pound. Indeed, the US dollar has become the currency of choice in pricing and payment for choice real estate transactions, luxury goods & services in certain sectors of our economy, and even bribes and underhand transactions. Specifically, the dollar is the ultimate currency of choice for corrupt officials, whose modus operandi is to cart large Ghana-must-go bags to black market operators in exchange for dollars, and then covertly (and sometimes overtly) ship these funds to exotic financial havens like Dubai, the Cayman Islands and Zurich. Worryingly, these activities take place under the noses of regulators and security agencies that find it convenient to turn the other way when these atrocities are committed. More on this shortly.
In truth, the backbone and epicenter of our currency’s challenges is the notorious black market. For the avoidance of doubt, the black market is illegality personified. It primarily consists of many floating players, including nomadic street operators; a number of Bureau De Change (BDC) operators who circumvent the CBN regulations; unlicensed foreign currency traders who buy and sell both cash and foreign transfers; and banks who round-trip with reckless abandon. Their illicit operations are interwoven, and in their interconnectedness, they are tragically all willing participants in doing serious damage to the Naira and the economy. In short, they are what we can call thriving economic saboteurs. What makes this tragedy more comical is that the major source of their supply is actually the CBN! These economic saboteurs get their dollar supplies directly and indirectly from the CBN. Unbelievable, you may think. But where exactly did this ‘black market’ come from, and why is it so deeply entrenched in our economy today?
The Central Bank started funding the black market when it (wittingly or unwittingly) churned out hundreds of BDC licenses under the guise of sanitising the market. This policy was aided, abated and expanded by subsequent CBN administrations that issued more licenses. Now, in theory, the concept of issuing these licenses to the right set of people seemed a rational economic policy to cater for the retail end of the foreign exchange market. However, the operative word here is right, and unfortunately, the wrong set of people for the wrong set of reasons have acquired these licenses. The CBN has further compounded this problem by continuing to doll out quantum amounts of dollars to BDCs on a weekly basis. Specifically, the CBN gives an average of about $30,000 to each of the approximately 3,000 BDC operators on a weekly basis. That amounts to a staggering $90 million in the hands of the operators (most of whom are the wrong set of people) on a weekly basis. Now, what happens when you empower the wrong set of people with these insane amounts every week? Well, you can expect a wrong set of decisions and the wrong set of results: We can safely estimate that over the last 10 years, no less than $50 billion (appx $5bn per year) has gone straight to the almighty black market!
It is a dangerously vicious cycle. As long as the black market continues to be well funded, it remains the market of choice for government officials and politicians to convert stolen public funds to dollars and ship abroad; it remains the market of choice for banks and bankers to round-trip foreign currencies; it remains the market of choice for exporters to divert export proceeds, AND for rogue traders and money launderers to, well, roguely trade and launder money. This vicious cycle has made utter nonsense of our money laundering and foreign exchange laws. The cumulative effect of this cycle has rendered our local currency useless. In layman’s terms, as long as this market continues to thrive and grow, the Naira will remain battered and our economy will remain on the brink of a catastrophic collapse. The black market pricing model always makes the Naira weaker than usual and invariably, the gap between the official rate and the black market rate is usually wide, making the central bank to always chase the legal market rate. This also encourages round-tripping, rent-seeking and arbitrage opportunities.
So what exactly is the solution to this currency quagmire? First, the government has to annihilate the black market. When I say annihilate, I mean completely obliterate the market using every legal force available. The first phase of attack has to be the street operators. They are the delivery men if you will; (un)knowing agents of chaos who are simply making ends meet, but whose means of livelihood is coming at the expense of the Nigerian economy. At every corner they operate from, they are deeply entrenched and heavily connected. It goes without saying that they have to be shooed away with tact, guile, caution and a sprinkle of diplomacy. If they refuse these diplomatic overtures to cease and desist, then they must be treated as criminals, and subsequently arrested, charged and prosecuted for trafficking illegally in foreign currencies, all in line with our existing laws. This has to be executed nationwide by the sustained efforts of a security task force consisting of the police and EFCC officials, and must be done without tribal or ethno-religious sentiments.
Of course, a lot of people incorrectly assume that eliminating the black market will be a difficult, if not impossible task. Around the world, black markets only exist when there is an artificial scarcity of products, or where government regulations unwittingly stifle the legal market. In Nigeria, the black market for Petroleum Motor Spirit (PMS) only surfaces when there is artificial scarcity or when the market becomes apprehensive about a possible price increase or import shortage. The currency black market does not exist in any developed economy because currency trading is governed by a transparent set of rules and policies.
Secondly, a firm spotlight has to be beamed on the BDCs. The CBN has to enforce its existing regulations on BDCs by withdrawing the licenses of violators and prosecuting them accordingly. In addition, this nonsense of dolling out dollars to BDCs on a weekly basis has to stop. Alternatively, the BDCs should be made to bid for the foreign currency according to their actual needs (based on their customers’ demands), and should be re-upped only after they have exhausted the funds given to them, to the satisfaction of the CBN and in strict compliance with its stipulated guidelines. In truth, our BDCs’ operations should mirror the operations of their counterparts in the developed countries- where the foreign currencies are primarily bought and sold by retail travelers and subject to strict guidelines. They are primarily present at airports and high streets catering to travelers-in-transit and tourists respectively.
Finally, the Central Bank of Nigeria genuinely needs to overhaul its foreign exchange regime. It has been tinkering with its FX policies, and its flippity-floppity has only created confusion in the minds of Nigerian users, foreign investors and our partners abroad. There is nothing worse than an unstable foreign exchange climate, and, in its desperate attempt to control the slide of the value of our currency, the CBN has only aided this unstable climate. The CBN has tried to rein in on the incidences of round-tripping by implementing some half-baked measures and by introducing gazebo regulations like the banning of the payment of dollar cash into all domiciliary accounts and the restriction on certain imports eligible for foreign exchange transactions at the CBN window, but these moves are too broad-based and grossly ineffective. It almost amounts to treating cancer with panadol!
In truth, a more transparent and simple foreign exchange regulation needs to be put in place. Simplicity and transparency is critical to enable buyers and sellers understand the rules and apply them accordingly, thereby leaving little or no room for circumvention. Specifically, all foreign exchange inflows into our economy – oil export earnings, non-oil export earnings, taxation, foreign/home remittances, cash in-flow from tourists, foreign loans and grants – should all form a pool of our foreign exchange stock, with the information being made available by the banks to the CBN real-time. No foreign currency provider should operate outside this system. Likewise, all foreign exchange users – importers, government, tourists, payment for services, debt repayments etc – should equally tap from this pool of available FX under the strict guidance of the CBN, and only through authorized dealers (i.e the Banks and licensed BDC operators). End-users such as holders of Naira debit cards, retail users, small traders, importers and manufacturers, can be easily accommodated under this regime with minimum documentation but strict enforcement and prosecution of violators.
Of course, the elementary principle of the laws of demand and supply would apply here. The currency price (or exchange rate) will be determined daily by equilibrium, and the CBN’s role will be to intervene regularly to maintain and sustain the value of the Naira within a steady band. The government’s role will be to: 1. Put in place fiscal policies that will conserve our foreign exchange supply; 2. Curtail corruption and leakages within the system and; 3. Manage the nation’s resources judiciously to boost supply and curtail demand. This is not different from what other countries are doing successfully, and it will help the banks and the governments (via CBN) uncover all those who are dealing illegally. Unlicensed foreign exchange dealers must be treated as criminals because they are the major agents of money laundering criminals and drug traffickers. Since they deal more in foreign transfers, their activities would be easily curtailed with a specific ban on payment of cash into, and transfers out of, these flagged domiciliary accounts. As a follow-up, the security task force mentioned earlier should raid their offices regularly and push them out of business. Of course, the legislation already exists, but I strongly propose a more aggressive regulatory posture, combined with a sustainable and hard-nosed foreign exchange policy that will restore sanity and strengthen the Naira in the shortest possible time.
Aside from the aforementioned solutions, public orientation has to be the order of the day. It has to be known by all and sundry that our precious Naira- the wonderful bastion of our economic independence- is the only legal tender in Nigeria. No other currency should be openly handled, traded or transacted in Nigeria. There should be no payment for goods and services within Nigeria in any currency other than the Naira. Under no circumstance should any entity – private, government, individuals – demand or accept payment for goods and services in any foreign currency.The law already exists to this effect, and it has to be rigorously enforced. There should be a public enlightenment campaign conducted by the CBN, perhaps in collaboration with the National Orientation Agency (NOA). Violators should be promptly prosecuted, and this will immediately serve as a deterrence to the abnormal practice of invoicing goods and services in dollars
Some economists have suggested that a more effective solution would be to navigate the Naira currency towards becoming internationally tradable in the not-too-distant-future, but our economy is not yet mature enough for this, and our foreign reserves have been depleted to insignificance. This is the subject of another debate we can have some other time. If we are truly serious about curtailing corruption and sanitizing our growing economy now, we have no other choice but to clean up the murky and corrupt foreign exchange market. I believe that if these remedies are applied swiftly, we will see immediate impacts on the value of the Naira. Of course, it is no secret that many bankers, government and security personnel are corrupt and can easily be influenced, and therein lies the danger of trying to implement some, if not all of, the aforementioned solutions. This is where our dear President comes into the picture. He should move swiftly by reading the riot act to these economic saboteurs, flushing them out of the system as a consequence. And with the diligent prosecution of these offenders, the system will become more sanitised, and our economy, the Naira and our collective peace of mind, will rebound in earnest.
Otunba Femi Pedro