The restriction on dollar deposit limits imposed on Deposit Money Banks (DMBs) by the Central Bank of Nigeria (CBN) has led to a chain of reactions by many businesses which solely rely on the greenback, reports Ibrahim Apekhade Yusuf
A dollar economy is probably where the dollar remains largely the major commodity for trade and exchange, especially by high net worth individuals, corporate and businessmen alike, many of who wheel and deal on the greenback because of the economic value attached to it.
The above scenario is sadly the reality with Nigeria, where the value of the naira is no longer worth the paper on which it is printed upon, a development, which in the view of some experts, does not bode well for the economy at all.
Thankfully, the Central Bank of Nigeria has taken a number of measures to address the situation, chief among which includes the restriction on dollar deposit limits.
Rationale for CBN new policy regime
In a statement announcing the ban on foreign currency cash deposits, the apex bank said it arrived at that decision bearing in mind the recent statements by Deposit Money Banks (DMBs) concerning the large volume of foreign currencies in their vaults hence, the need to stop accepting foreign currency cash deposits into customers’ domiciliary accounts.
Specifically, the apex bank said as part of continued efforts to stop illicit financial flows in the Nigerian banking system which aligns with the anti-money laundering stance of the federal government: “The CBN hereby prohibits from the date of this circular the acceptance of foreign currency cash deposits by DMBs.
“For foreign currency cash lodgments made prior to the date of this circular, the account holder has the option to either withdraw his or her foreign currency cash or the Naira equivalent. For the avoidance of doubt, only wire transfers to and from Domiciliary Accounts are henceforth permissible.
“The CBN advises individuals that wish to source foreign currency for eligible and legitimate purposes such as BTA, PTA medical, mortgage, school fees, goods etc. to do so through recognised channels with the use of Form ‘A’ for “invisible” and Form ‘M’ for “visible” transactions. Please ensure strict compliance.”
The CBN said in a statement on its website on Wednesday that the move will help “efforts to stop illicit financial flows in the Nigerian banking system.”
The CBN decision was further reinforced by a statement: ‘Renewed Vigilance to Prohibit Illicit Financial Flows in Nigeria’s Banking System.’
In the statement Ibrahim Muazu, Director Corporate Communication, CBN, stated: “The Central Bank of Nigeria (CBN) notes with concern a recent report by the Global Financial Integrity group, which ranks Nigeria as one of the 10 largest countries for illicit financial flows in the world.
“Although we do not have an independent confirmation of this assertion, the report estimates that about US$15.7 billion of illicit funds go through our system annually.”
It added that “CBN will increase its vigilance to ensure that Nigerian banks are not used as conduits for illicit fund flows, especially in foreign currencies.
“We note and applaud that in line with global best practice, Nigerian banks have started to curtail the acceptance of foreign currency cash deposits, much the same way as customers in other countries cannot just walk into banks and make foreign currency cash deposits without proper documentation.
“We wish to assure all citizens seeking foreign currencies for legitimate personal and/or business interests that there remains ample opportunity to do so within the law. The CBN’s Foreign Exchange Rules have many windows for accessing foreign exchange for legitimate business as well as for personal commitments.”
How banks reacted to CBN forex restriction policy
As to be expected, the moment the CBN announced the new rule on forex, some Nigerian banks including Guaranty Trust Bank Plc and Fidelity Bank Plc sent messages to customers informing them that they will no longer accept foreign currency deposits in cash, citing large volumes of such funds in their vaults which they can’t place with the CBN.
According to the Group Managing Director, First City Monument Bank Plc (FCMB), Ladi Balogun, commercial banks are not collecting cash deposits in dollars in order to discourage naira speculation.
“Banks no longer accept dollar cash due to large speculation on the currency. However, commercial lenders will continue to receive dollar transfers from other banks,” he said.
He told Reuters that another Nigerian lender, who asked not to be identified confirmed the CBN stance.
“We are constrained due to the current influx of foreign exchange cash deposits we have been receiving in recent times, and the lack of available foreign exchange cash outlets, to stop receiving foreign exchange cash deposits.”
Also, Standard Chartered Bank told its customers it would no longer accept foreign exchange deposits in cash due to an unprecedented influx of cash deposits by customers.
The bank said it would stop receiving forex cash deposits from August 11, “until the situation improves.”
Discordant tunes over forex policy
A senior bank treasurer and executive member of Financial Market Dealers Association of Nigeria (FMDA), who asked not to be named, said the decision by banks to stop accepting foreign currency deposits into domiciliary accounts was in protest of the new policy.
He said: “There was no official communication from CBN that it would no longer collect dollar cash from banks. The whole thing started when two or three banks took their dollars to the CBN for swap on Thursday, and the CBN rejected the cash.
“As a result, banks now found themselves with huge volume of dollars that are practically useless to them. To protest this development, banks have stopped accepting foreign currency deposits across the counter into domiciliary accounts.
“The reality is that accepting such deposits is useless to banks. They cannot trade the currency and they cannot transfer it. So it is useless.”
He said the new CBN policy implied that everybody who wanted to deposit into domiciliary account was a money launderer, which was not possible.
“This negates the purpose of banking. It is a knee-jerk policy, which is not sustainable, though it might force appreciation of the naira in the parallel market in the short term.”
Echoing similar sentiments, Mr. Taiwo Adeniyi, Group Managing Director/Chief Executive, Vitafoam Nigeria Plc, in an interview with The Nation said the government policy on forex is having a toll on manufacturers.
“Now, forex is not available. And yet we need to establish letters of credit, as such, we have to source forex outside of the CBN platform. And when you’re going to source forex outside of the CBN platform that means you just have to source it in the parallel market. But again, the parallel market is also being controlled. So, for you to be able to have access, it is tough.”
Pressed further, the Vitafoam boss said, “The latest one that is causing us serious challenge is the fact that before you can service an LC, 48 hours before the bank can go and bid, the cash must be made available. The reverse used to be the case before now. Before now, the bank goes to make a bid on your behalf based on document evidence and the CBN in turns gives its authorisation, that is approval and the bank make the funds available once your bid is successful.
“But right now, the CBN is saying 48 hours before you bid, the funds must be made available and even when that is done, it would not guarantee that you will get what you ask for.”
In a related development, President, Association of Bureaux De Change Operators of Nigeria, Alhaji Aminu Gwadabe, told newsmen that the policy had started impacting negatively on the economy as importers had started diverting their businesses to neighbouring countries.
He said the protest by banks had, however, started impacting negatively on the economy.
“The surplus dollars in the street market is unavailable to the local importers as they cannot transact with it through their bankers. The neighbouring countries are having a field day mopping up the excess cash dollar liquidity, a very cheap rate for the use of their imports to the detriment of the local importer.
“Our local importers divert the payments of their imports to those neighbouring countries. The local importers also divert their consignments to the ports of the neighbouring countries.
“The current market situation is enabling business activities to flourish in the neighbouring countries,” he said.
Forex policy a blessing in disguise
After banks notified their customers on plans to stop receiving foreign currency cash deposit, the naira had appreciated against the dollar significantly.
Besides, it was also anticipated that the US dollar will further tumble against the naira at the parallel market in due course as Deposit Money Banks continue to reject cash deposit of foreign currencies into customers’ domiciliary accounts.
The apex bank had barred 41 items from access to foreign exchange. It had directed that as from August 1, all foreign exchange transactions in any Bureau de Change must have the BVN of applicants as foreigners were said to have invaded the nation’s foreign exchange market.
Forex dealers attributed the naira’s gain to excess supply of the greenback in the market, even as it looked like a lot of speculators would lose out in the new trend.
It was gathered from the CBN that commercial banks that currently had dollars in excess of $1 billion in their vaults, have started taking desperate measures to mitigate currency risk. Bureaux de change (BDC) operators disclosed that banks have stopped accepting dollars because they have too much cash in their vaults.
As a result of the development, banks have been rejecting dollar deposits into domiciliary accounts, but customers are allowed to withdraw cash from their accounts.
“The reason the banks have too much cash is due to speculation and money laundering. A lot of people have been speculating against the naira and amassed so much cash. Then there are those who have been amassing dollars obtained illicitly and want to launder them.”
“The Central Bank is doing all it can to control demand for dollars,” Sewa Wusu, head of research at Sterling Capital Markets Ltd., said by phone from Lagos, adding, “It sends another signal to the market that the CBN is assertive and determined to ensure there are no arbitrage opportunities.”
Governor Godwin Emefiele in June stopped importers of about 40 types of goods, including furniture, textiles and rice, from accessing official foreign-currency channels, leaving many to use illegal markets.
The CBN will also sell as much as $30,000 to each of Nigeria’s 2,715 registered money changers, Gwadabe, said.
The last such “special intervention” was “two to three months ago” and this one will be in addition to regular weekly sales of about $80 million, he said.
“Every bureau will take up the opportunity,” Gwadabe said. They have “been clamouring” for more dollar supplies from the CBN, he said.
Black market
The naira strengthened on the black market to 215 per dollar from 240 as traders flooded it with U.S. currency following the rejection of the deposits by lenders. It was around 218 on Thursday, said Gwadabe.
On the official interbank market, the rate dropped 0.2 percent to 199.02 per dollar as of 12:45 a.m. in Lagos on Thursday, having remained mostly around that level since March. It has weakened 19 percent in the past year.
Lawmakers to the rescue
Meanwhile, Emefiele has been summoned to the Senate in Abuja to explain the naira’s weakness on the parallel market.
The Senate on Wednesday passed a motion directing the CBN governor to appear before it to brief members on the state of the nation’s economy, especially the alarming naira depreciation.
The upper chamber gave the directive after an exhaustive debate on a motion moved by Senator Nazfiz Suleiman (Bauchi North) entitled: ‘The state of the economy: Naira depreciation and its implications.’
The senators also urged the federal government to step up efforts to diversify the nation’s economy to depend on taxation, agriculture, manufacturing, international tourism and solid mineral prospecting. Suleiman had in his lead debate noted with serious concern the state of the nation’s economy as it affected the continuous depreciation of the naira.
He expressed worry that naira had depreciated in the last few months at a much faster rate than it appreciated over the last two years.
The senator further argued that the depreciation was the consequence of the negative cash flow, which he said resulted from the downward trend of oil prices.
He added that the situation had been worsened by speculations in the foreign exchange market.
Suleiman also observed that the foreign exchange needs of various sectors of the economy were not being made available, while Nigeria’s commitments in the global economy had dwindled.
The senator also expressed concern that the Nigerian banking industry might be currently defaulting in the global economy, stressing that the situation had been sending a wrong signal about the state of the economy.
Suleiman also said the speculation caused by the situation was resulting in a huge capital flight, with the attendant inflationary consequence, which he said would affect an average Nigerian on the street.
“The illicit fund flows and money laundering going through Nigerian financial system contribute in weakening the value of the naira, which has made the recent decisions of CBN to increase its vigilance to ensure that Nigerian banks are not used as conduit for illicit fund flow and money laundering in foreign currencies,” he said.
He stressed the need to regulate the demand and supply of foreign exchange by the CBN with various options in order to curtail naira depreciation and discourage speculation.
In his contribution, the Minority Whip, Senator Philip Aduda, blamed the downward slide in the value of naira on the inability of the Federal Government to put in place stable economic policies.
Senator Gbolahan Dada (Ogun West) said if the situation must be effectively tackled, Nigeria must define its economic policies and make laws that would address fraud.
He lamented that the country’s dependence on imported items without tangible production had been the bane of a stable naira exchange rate.
Senate President, Bukola Saraki, said all powers must be deployed to defend the naira and that the influx of foreign items into the country must be adequately curtailed in a way that the activities of currency speculators would be brought under control.
It is the view of analysts that no efforts should be spared to make the naira stronger but they contend that whatever measures are taken should be based on political expediency.
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