Bank CEOs, Experts Differ On New Forex Restriction Bank CEOs, Experts Differ On New Forex Restriction | Independent Newspapers Limited
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Bank CEOs, Experts Differ On New Forex Restriction Bank CEOs, Experts Differ On New Forex Restriction

Posted: Jul 1, 2015 at 12:03 am   /   by   /   comments (0)

By Bamidele Ogunwusi and 

Akinwumi King, Lagos

The nation’s apex bank, the Central Bank of Nigeria (CBN) last week imposed further restrictions on the foreign exchange market by excluding 41 products and services from purchase of dollars from the nation’s foreign exchange market.

“For the avoidance of doubt, please note that the importation of these items are not banned, thus importers desirous of importing these items shall do so using their own funds without recourse to the Nigerian foreign exchange markets”, the apex bank said in a circular issued on Tuesday.

Though, the CBN said that the purpose of the restriction is to conserve the nation’s foreign reserves, which has fallen by $10.59 billion from $39.62 billion in September to $29.03 billion last week, and promote local production of the products, analysts at the Financial Derivative Company argue that the main reason might be because another devaluation will impose further hardship on Nigerians


CEOs’ Support

Some banks Chief Executive Officers (CEOs) in Nigeria, have commended the recent pronouncement by the Central Bank of Nigeria (CBN) banning importers from using the foreign-exchange market for some goods as it seeks to conserve external reserves.

The banks CEOs who commended the CBN over the new policy last week at a roundtable organised by Bloomberg and the Nigerian Stock Exchange (NSE), believed that the ban may be positive in the long run if local production is stimulated.

Speaking at the event, Group Managing Director, First Bank of Nigeria Limited, Bisi Onasanya, said there was nothing wrong in the Apex Bank coming out with such policy.

According to Onasanya, “I don’t think there is anything wrong in CBN coming to say I will not fund my reserves with the importation of this and this. It is possible it could be positive in the long run.

“These are luxury items, if they are not luxury items, they are non-necessity. You don’t have to eat Geishar; if you have to eat it and the price is a million naira, if you can afford it, then buy.

“There are local substitutes for every item on that list. So let us work to develop the local substitutes. You could find egg on that list; you could find chicken on the list; there is productionof those items within Nigeria. In my own opinion, it is the right step in the right direction. Banks should work with local manufacturers to create opportunities,” he said.

On his part, Group Managing Director, Zenith Bank, Peter Amangbo, noted that the move by the CBN was the right thing to do. “Some of the goods at one point were not locally produced.

“Take for instance, fruit juice, there was a time when it was 100 per cent imported, but today we have two or three dominant players. The few you probably see towards Christmas imported are very few. What the CBN has done now will make it very expensive for these items to come in and people will start to look inward.

“What the CBN has done is to say that the foreign currency we have is to be allocated to what exactly it is need for,” Amangbo added.

Forty items ranging from private jets to rice, wheelbarrows and Indian incense are covered by the edict. The regulator also stopped Nigerians from using hard currency from the interbank market to buy Eurobonds and foreign shares.

According to the CBN Governor, Godwin Emefiele, Nigeria can’t continue to be an import-dependent economy, spending an average of 1.3 trillion naira ($6.5 billion) a year bringing rice, fish, wheat and sugar into the country.

The nation’s foreign-currency reserves have declined 27 per cent to $29 billion since the end of last September. The restriction announced Tuesday last week is expected to have similar effect.


Impact Of New Restrictions

According to a retired top management staff of CBN, the exclusion of the importation of the 41 items from the nation’s foreign exchange market will only heighten uncertainty and flight of foreign investors from Nigeria. “Mark my word, the naira will crash”.

According to him: “the policy will increase sharp practices as people will claim to purchase foreign exchange for items not excluded, but will use it to import the excluded items. Remember our ports are very porous, with prevalence of sharp practices. The CBN cannot monitor what people import or use the dollars to purchase. As a result, sharp practices will abound,” the retired said on condition of anonymity”.

A senior bank foreign exchange dealer also said that while the restriction might reduce demand for dollars in the interbank market, it would certainly increase demand for dollars in the black market, hence the black market exchange rate is expected to rise, and the gap between it and the interbank rate widen further.

The policy, according to Alhaji Aminu Gwadabe, Chief Executive Officer, Sabil BDC, has further created room for speculation and hoarding.

He noted that already parallel market exchange rate has risen to N226 per dollar on Friday from N220 on Monday, thus increasing the gap between the parallel market and the interbank market to N28.59 from N21.35 within five days.

On their part, analysts at Afrinvest Plc said that the restrictions lack the ability to stimulate domestic production of the products excluded, and will lead to further devaluation of the naira.

“We note that the capability of these restrictions to stimulate domestic production of the excluded items, as suggested by the CBN depends to a large extent on too many variables outside the CBN’s purview”, they stated in the Afrinvest Weekly Update issued on Friday.

“Structural weaknesses and infrastructural constraints which strains competitive local production and the rigorous discipline and tight border control needed to implement import substitute strategies are vulnerabilities yet to be addressed. In our view, these factors will continue to dissuade the long-term benefits of this restriction until conscious structural reforms by fiscal authorities and supportive monetary policies are directed towards addressing the weaknesses.

“Pressure at the interbank foreign exchange market is expected to ease while the transferred effect will become visible at the BDC and Street segments as importers re-direct demand. Hence, we perceive this as yet another dodgy devaluation of the Naira as we expect the spread between FX rate at the interbank and BDC/Street market to widen markedly.

“This may further pressure inflation rate and Banks’ trading income due to further reduction of interbank liquidity. In addition, revenue from custom duties may be limited even as higher spread between interbank and BDC/Street market may further incentivize sharp practices.”

These predictions imply that the latest restrictions aimed at saving the naira may end up doing more harm to the economy than good. While the restrictions may help to conserve the nation’s foreign reserves, as posited by the CBN, it would definitely promote sharp practice in the foreign exchange market.

Further, in the short term, rather than stimulate local economy, it would lead to increase in the prices of the excluded items, and hence aggravate the deteriorating inflationary situation. Consequently, the restrictions, for now, represent the most convenient policy choice from a regulatory perspective, but like previous restrictions, it might turn out to be another attempt to avoid the inevitable.