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By: Sir Henry Olujimi Boyo (Les Leba), first published in May 2005


Today’s article is part 3 of the series titled “Dollar Certificates Will Banish Chronic Poverty and Enhance Efficient Resource Allocation!” Part 1 discussed the advantages of NOT converting dollar derived revenue to naira for the payment of statutory allocations, while Part 2 discussed a proposal aimed at improving the value of the naira. If you missed these articles, they can be found using the link below.

In part 3 of this series, we examine a process by which importers can access foreign exchange for the payments of their imports. This new process would not only reduce foreign exchange scams but will break the monopoly of the CBN in the foreign exchange market, which will also enable the Apex bank to function more effectively in creating a stable economy. Like its predecessors, this article provides clear guidelines along with an effective rationale. Keeping in mind that the entirety of this series was initially published in the year 2005, but remains crucial due to the worsening state of our economy, let us read on!

(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)

In the first part of this series on the adoption of dollar certificates for the payment of the dollar component of federal revenue to constitutional beneficiaries, a case was made for the superiority of this system over the current practice where the Central Bank of Nigeria (CBN) unilaterally converts the foreign exchange component of federal revenue to naira at its own unilaterally undeclared rate before sharing the resultant huge naira sum to the beneficiaries of the federation pool, with the attendant adverse excess liquidity problems in the economy. In the second part of the series last week, we explained the framework for the operation of a liberalised foreign exchange market and examined the positive catalytic effects the proposed system will have on the Nigerian economy and the great potential for poverty alleviation in the land.

This week, we shall examine the proposed process for importers to pay for their imports and how they will access foreign exchange for this purpose. One thing is certain; this system minimizes the opportunities for round-tripping and other foreign exchange scams, which the CBN has claimed that the Commercial Banks currently engage in. The proposed system would also break the monopoly of the CBN in the foreign exchange market and allow the CBN to perform its regulatory and stabilization functions much more effectively. The following is an excerpt from a paper titled “A LIBERALISED FOREIGN EXCHANGE MARKET, a proposal for a liberalised foreign exchange market in Nigeria and its economic benefits” Please read on.

3.7 PAYMENT FOR IMPORTS AND FOREX AUCTIONS All foreign exchange revenue derived from the federation will continue to be domiciled with the CBN.

3.7.1 Each financial institution involved in forex business, particularly the commercial banks and all beneficiaries of statutory allocation will maintain a domiciliary account with the CBN.

3.7.2 Purchase of forex under this system will be for payment for goods and services approved as per the current CBN import guidelines.

3.7.3 All importers (including manufacturers, traders, etc.) who require foreign exchange to pay for their import bills would approach the local branch of their (buyers) bank and submit their request for the purchase of forex at the prevailing/negotiated exchange rate. With the full naira cover in their account, a letter of credit will be opened on their behalf with the overseas correspondent bank of the local bank. The usual CBN’s Forms ‘A’ and ‘M’ will of course be completed for monitoring and statistical purposes. Details of each transaction will be filed with the CBN so that the domiciliary account of each bank with the CBN will be updated and further instruction on disbursement effected when received.

3.7.4 Private sector importers with dollar-denominated domiciliary accounts (for example, exporters) will complete necessary import documentation at their banks. Copies of the documents will be forwarded to the CBN for statistical consolidation. Their dollar accounts with their banks will be debited with the import value. Records of daily balances and movements in the domiciliary accounts in the private sector will be filed with the CBN.

3.7.5 Public sector importers with balances on their dollar certificates will similarly complete necessary import documentation at their banks (for goods and services that conform with CBN import guidelines). CBN's receipt of completed forms will serve as instruction for their domiciliary accounts with the CBN to be debited to the import value.

3.7.6 All exporters with dollar-denominated accounts would not be required to sell their dollars on receipt only to repurchase the same dollars through the exchange market for their import requirements.

3.7.7 Prime import documents such as Bill of Lading, Packing List and Original Invoices must be attested by the customs authority from the country of shipment or origin as the case may be before shipment to Nigeria. In addition, all imports will be subject to 100 per cent physical destination inspection to check misappropriation of forex purchased.

3.7.8 There would no longer be a formal elaborate central bidding system under any guise whatsoever for the determination of the naira rate of exchange.

3.7.9 Banks will only earn a commission or a spread between buying and selling rates and all transactions must be properly documented and returns provided to the CBN daily.

3.7.10 The permissible arbitrage payable to banks for buying and selling of foreign exchange should not exceed what obtains in the capital market internationally. This figure will be specified by the CBN.

3.7.11 The central bank will retain an audit team in banks and other financial institutions to collect data on all transactions of interest to CBN operations to ensure commercial practices are in line with Central Bank regulations and expectations.

3.7.12 The CBN audit officers will be expected to send daily audit returns to the appropriate CBN dept responsible for monitoring and evaluating forex transactions as well as other such specific information required by the CBN from time to time.

3.7.13 The presence of the above resident audit officers is without prejudice to the existence of other CBN investigative and monitoring teams dedicated to ensuring compliance in the money market.

3.7.14 The portions of the public sector dollar certificates which have not been sold to the banks in any month would remain as reserve or savings in their domiciliary account with the CBN and the beneficiary can convert such into naira at any time the agency chooses at whatever the prevailing rate of exchange with the dollar at his local bank after the usual offer and acceptance process, accompanied with the appropriate import documentation properly completed.

3.7.15 If and when it promotes desired economic objectives or targets, the CBN can draw on the foreign reserves by selling part of its earned dollars to meet an unsatisfied demand for foreign exchange at the exchange rate set by the market.

3.7.16 Commercial banks and selected bureau de change will be co-opted to buy and sell travellers' cheques demanded by the travelling public.

3.7.17 Denomination of payments for all government tariffs and fees should be strictly in naira.

If adopted, the above system will ensure that the banks resort to real banking that will energize the economy. The current inordinate profits from forex transactions and yield from high interest-bearing Treasury bills (13 per cent when rates on Treasury bills is focused economies hover between 2-4 per cent) will disappear. The exchange rate of the naira against the dollar will improve and the CBN can judiciously guide money supply to achieve a realistic exchange rate of between N20-50/$. Indeed, a liberalised forex market obtains in those countries with a bourgeoning economic climate; whenever the forex market is centrally controlled as in the Nigerian case, the evidence on the ground is usually that of a depreciating currency, high-interest rates, low levels of employment and heavy dependence of a small elite on rent-seeking.

Indeed, it is clear that the current obtuse Dutch Auction System (DAS) is responsible for the continuously depreciating naira and our dismal state of poverty. The wholesale Dutch auction system proposed by the CBN to replace DAS later in 2005 will not provide the succour anticipated for the economy; the wholesale DAS will only transfer the monopoly of the CBN in the forex market to 10 or so mega banks. All other banks would have to access the forex requirements of their customers through the ‘big banks’. The resultant market will be a trade cartel which would be nowhere near a truly deregulated market. The Nigerian economic predicament, of more work, larger dollar reserves and increased poverty will prevail. All beneficiaries of federally allocated revenue would still have to repurchase their dollar requirements for imports from DAS at a price that is over 25 per cent higher than the rate at which the CBN unilaterally converted the dollar component of federal revenue before sharing. A word is enough for the wise!

Save the Naira, Save Nigeria!