Thursday, March 30, 2017 07.20 AM / Proshare Research
Subsequent to the long-awaited intervention in our foreign exchange market by the Central Bank of Nigeria (CBN) in H2 2016 guided by a managed float policy approach, the CBN subsequently decided on the periodic publication of the Foreign Exchange (FX) utilisation by banks on a two-pronged basis – first, a weekly utilization published in print newspapers only and secondly, a monthly publication sent to the CBN for collation and publication on the CBN Website.
This action, the CBN posits was in furtherance of its desire to demonstrate transparency in its foreign exchange management regime.
The policy was a response to what has been represented as CBN’s concerns about “leaving the foreign exchange market to MDB’s which would/could destabilize the “system” by speculating in the forex market”.
The CBN equally took actions that targeted the bureau de change (BDC) operators/market (which it licenses and hence regulates) as well as intervene in selected and bulk requirement needs of the market.
The CBN has since published three (3) of such reports viz: October 2016, November 2016 and January 2017.
These publications has attracted interesting commentaries especially the 76-page November 2016 report released on January 24, 2017 by the CBN which disclosed disbursements totaling $1.07 billion to 4,328 manufacturers, power and other real sector operators for the procurement of raw materials, plants and machinery but was fraught with inconsistent rates that generated a public outcry leading to a press release that essential placed the blame with the banks.
In the CBN’s February 17, 2017 early ‘morning after’ release titled CBN makes further clarification on FOREX sale. The Central Bank stated as follows:
1. The CBN DOES NOT deal directly with any Bank customer on foreign exchange transactions. Such transactions are consummated strictly between the customers and their respective Deposit Money Banks (DMBs);
2. The figures of FOREX sale published in national dailies or on CBN website, over which insinuations are being formed, were transactions consummated between the DMBs and their customers;
3. Pursuant to our policy of transparency, we published the reports of purchases and sales of forex between the DMBs and their customers, as submitted by the banks without editing. This practice of publishing the figures on our website has been on since October 2016;
4. Following observations of different exchange rates after the last publication on our website (www.cbn.gov.ng), we called for explanations from the banks concerned.
5. In response to our queries to them, apart from some observed formatting errors, the concerned banks reported that the returns were sent on the basis which the transactions were conducted. The transactions concerned were consummated in third currencies such as Japanese Yen and South African Rand (YEN/ZAR); JPY/NGN, EUR/USD, USD/ZAR. As a result, there is no way any DMB or the CBN will deal in forex transaction at the rates of 61kobo/USD, N18/US$1 or N3/US$1, as were erroneously reported.
Beyond this press release, no other communication on the incident has been released by the CBN concerning the practice, process and management of the process; except for targeted interventions in the market that has seen the exchange rate of $/N drop to N360 for travel, medical and student fee payments/needs .
It was therefore imperative, prudent and professionally obligatory for us to take a more detailed interest in the January 2017 FX Utilization report.
The report below attempts to capture some of the lessons by addressing the following issues arising thereform:
1. Gain a better understanding of the FX regime that increasingly appears opaque in order to address the transparency, credibility and integrity questions often raised by operators, buyers and sellers of foreign exchange in Nigeria;
2. Review the larger implications abdicating responsibility by admission of possible wrong acts by DMB’s under its regulatory control, an act that has become more visible through the open admission/confirmations in media releases and official statements as to the “possible abuse, speculative activities and round tripping” by entities otherwise under its supervision and enforcement powers - a core regulatory responsibility/role;
3. Interrogate the implications of publishing names and personal details of customers of banks; especially in a security-challenged environment; and
4. Investigate why the “formatting errors” appear to mutate in each report published even as the CBN continues to issue / sound a disclaimer over reports (a natural part of its core mandate and oversight function) published on its own website.
This process has taken most of the last thirty days to conduct, and further works of necessity will continue on some of the key concerns above as we process the volumes of data we have gathered.
The report carried out a deep prognosis on the prevailing foreign exchange regime. It started by providing an insight on how cyclical factors and policy responses were responsible for the present exchange rate regime.
At the same time providing historical antecedents on how such foreign exchange played out in the past and its round about effect.
It pointed out the actual cost that has been incurred by the regulator, while sticking to such policy path.
The sales of foreign exchange by financial institutions to end users provided a peep on the underline nature of rate fragmentation. While it also identified inherent structural flaws within the system and how economic agents are responding to it.
The report identified the spread of rate asymmetric, which was not limited to the financial system alone. At the same time it was quick to point out the dangers of multiple exchange rates.
While identifying the relationship between multiple exchange rate and price movement, given earlier shocks to price.
The report arrived at a conclusion which is shared by many; that the CBN’s involvement in the parallel market, increase in the value of exogenous exports and external financing growth through non-borrowing financial flows; play a critical factor in determining the movement in domestic price.
In conclusion the report weighed on how much of fiduciary responsibility is respected, while trying to reassure faith in the exchange regime.
We hereby share some of the findings from the review in our ‘Proshare Confidential’ with the hope that remedial actions can be taken in the interest of the economy.
2. FX Utilization by Banks for January 2017 IRO Raw Materials, Plants and Machinery Published 3/1/2017 – Ref: FX Util Jan 2017
3. FX Utilization by Banks for November 2016 IRO Raw Materials, Plants and Machinery Published 1/24/2017 – Ref: CCD/GEN/FXU/11/2016
4. FX Utilization by Banks for October 2016 IRO Raw Materials, Plants and Machinery Published 11/30/2016 – Ref: CCD/GEN/FXU/112016
9. CBN Releases New Policy Actions in the Foreign Exchange Market – Feb 20, 2017
10. CBN Directs Authorised Dealers to Dedicate 60% of FX Purchases to End Users – Aug 24, 2016
12. The Nigerian Forex Situation – Aug 4, 2016
13. How the CBN Naira-Settled OTC FX Futures Market Will Work – Jun 16, 2016
14. The Nigerian Managed Float Exchange Rate System – Jun 15, 2016
16. What Banks Used 36.82% of FX allotted for between Jan 2013 to May 2015 – Jan 18, 2016
18. Forex: $1.42m was spent on health related service btw Jan 2013 to May 2015 – Jan 18, 2016
19. Top 10 Sub-Sectors with Highest FX Utilisation between Jan 2014 and May 2015 – Jan 18, 2016
21. FX Utilisation in Nigeria - Jan 2013 to May 2015: Exclusive Details – Jan 12, 2016