THE RECENT DSS RAID ON BDC OPERATORS
By: Sir Henry Olujimi Boyo (Les Leba), first published in November 2016
INTRO:
Today’s article was initially published in November 2016. However, due to recent events it has found its way back to the surface.On the 27th of July- just a week ago, published in various newspapers across the country was the CBN’s declaration banning sales of forex to Bureau De Change operators. This is an action that the late Sir Henry Boyo had preached about incessantly. The rationale given for this step, by Mr. Godwin Emefiele in the ‘Nigerian Tribune’ is: “To ensure the CBN is able to carry out its legitimate mandate of serving all Nigerians.” The belief is that this step will effectively target inflation, leading to an appreciation of the Naira, which will positively affect the economy at large. However, as the late Sir Henry Boyo endlessly taught, this step is NOT a “cure all” and on its own, will not be sufficient to jumpstart sustainable change. The below article provides insight- relevant to the current issues of monetary policy in Nigeria.
Earlier this year, we republished a 3-part series titled “Operation Save the Naira” which highlights the necessary steps required for sustainable change. This series can be found via the link below. When reading through the below article, please note the rates at its initial publication five years ago, which have since worsened. With all this in mind, let us read on.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo) ………………………………………………………………………………………………
An interview format is adopted in this article to examine the recent DSS raid on Bureau de Change (BDCs). Please read on:
Question: What is your opinion on the CBN’s policy that allows BDCs to buy dollars at N381/$ and sell at a maximum of N400/$.
Ans: It is not appropriate in the first place for CBN to define what exchange rates are applicable. The wide disparity between official and parallel market rates is the result of CBN’s reluctance to relinquish its oppressive monopoly in the forex market. Invariably, monopolists distort market prices, and the present volatile and rent seeking fuel and forex markets, are the prime products of stranglehold monopoly in both markets.
Question: It was reported that the Department of State Services (DSS) officials recently raided some BDCs for selling above stipulated exchange rate. Are such raids necessary?
Ans: There will be no need for CBN or DSS to harass BDC operators, if the exchange rate is determined by demand and supply. The raid on BDCs is infact a deliberate distraction, so that blame for price distortions will be transferred to BDCs rather than the real villain, which is CBN. The CBN’s monopoly of forex sales triggers widely divergent prices in the forex market; the Apex bank is certainly aware of the impact of the odious role it plays, but its management expects that Nigerians cannot see through the veil of deceit.
Question: Why do you say the CBN monopolises dollars?
Ans: The CBN controls over 80percent of dollar sales, so by definition and practice, CBN is therefore a monopolist in the forex market. Invariably, unfair pricing, rent seeking middlemen, product hoarding, and scarcity, are some of the economic hazards caused by monopolists everywhere.
Question: Do you think CBN’s action will affect foreign exchange in any way?
Ans: The DSS raids may not be sustainable and may ultimately become a source of “chop-chop” for the Security agencies. Consequently, whatever gains the Naira records, will only be temporary, and the gap between official and parallel market rates will remain widely divergent, so long as the deliberately created fundamental market distortions persist.
Question: How do you think the CBN can better control the exchange rate?
Ans: The CBN must urgently relinquish its oppressive monopoly in the foreign exchange market. The CBN’s monopoly unnecessarily induces dollar scarcity which unfortunately also exists simultaneously with a burdensome market surplus of Naira liquidity.
Consequently, so long as CBN continues to deliberately auction small rations of dollars, in a market which is undeniably suffocated with Naira surplus liquidity, it will be virtually impossible for the Naira exchange rate to be stronger (even if the price of crude oil rises to $200/barrel) and the gap between black market and official rate will always remain fairly wide apart. Besides, it is a no brainer that anything that is auctioned will invariably be sold for the higher or highest bids. So, it is paradoxical that CBN, as sole custodian and guardian of the Naira will sell its dollars to those who are ready to pay more Naira, in other words, CBN’s auctions inevitably weakens the Naira exchange rate.
Question: What is the major cause of this excess liquidity, you talk about?
Ans: For over 20 years, government has been monetizing its dollar receipts from crude oil export. This means that fresh Naira values are created by CBN and injected into the system as Naira allocations of dollar denominated revenue to the 3 tiers of government. So, the more dollars we earn, the more Naira (with depreciating values) will become available to drive higher prices of goods and services (inflation). Inflation, as you know, is a plague which decimates the purchasing power of all incomes with oppressive social and economic consequences.
Furthermore, when CBN also auctions rations of dollars in a market with excess Naira liquidity, it is inevitable that the Naira rate will continue to be threatened.
Question: So how do we minimize or eliminate excess liquidity?
Ans: The CBN can reduce excess liquidity by paying increasingly higher interest rates to induce banks to relinquish part of the surplus liquid cash in their custody; this is what the Apex bank does when it sales Treasury bills. But, apart from increasing government debt, this approach will always increase interest rates and crowd out the real sector from access to cheaper investible funds.
Additionally, the CBN could further raise the mandatory Cash Reserve Requirement (CRR) for banks, so that banks will have reduced access to their cash holdings; although this option does not create any significant direct cost to government, however, higher CRRs will constrain the capacity of banks to fund businesses and grow the economy, so the appropriate equilibrium level of money supply will be the point at which CBN is not forced to pay any interest to mop up liquidity.
Question: So, what is the progressive way out?
Ans: Well, ironically, unless CBN minimizes or indeed eliminates the practice of paying double digit interest rates to reduce the perceived excess Naira supply, primarily held by banks, Nigeria’s economy will continue to underperform, and the Naira will further weaken.
However, the CBN can steadily reduce the huge cumulative burden of liquidity by ceasing to substitute Naira allocations for distributable dollar revenue. Instead, beneficiaries of the Federation pool should be paid with dollar cheques/certificates or warrants. This process will restrain the expansive Naira creation that drives excess Naira liquidity; higher CRR could simultaneously also be imposed on banks to support the draining of the distortional excess liquidity that drives inflation, with its collateral of high cost of borrowing and deepening poverty.
Question: So how will this make the Naira stronger?
Ans: Beneficiaries of dollar cheques will be expected to convert their dollars to Naira with the subsisting cash holdings in commercial banks’, and Naira liquidity can also be modulated as required with an appropriate CRR by CBN. Under this option, you will recognize that even increasing dollar revenue does not unnecessarily translate to increasing Naira liquidity; consequently, we will ultimately begin to see a change in the forex market dynamics as more dollars appear to chase dwindling Naira liquidity.
Furthermore, the CBN would no longer threaten the Naira exchange rate by auctioning dollars against the local currency. Infact, the reverse will be the case and the Naira exchange rate will improve.
Question: Is it not possible that issuance of dollar certificates to states and MDAs will facilitate Capital flight?
Ans:No, it won’t, because the beneficiaries cannot collect dollar cash with their certificates, they can only collect the Naira equivalent from the commercial banks at the prevailing market exchange rate.
The dollars will always remain in the domiciliary account of Public beneficiaries with the CBN, who will then directly act on the instruction of those banks which purchased the dollar certificates from the original beneficiaries, to make onward payments for authorized and attested imports only. Similarly, other beneficiaries of dollar allocations, paid with certificates, will submit attested invoices for officially valid transactions to CBN for remittance of respective invoice values to overseas beneficiaries.
Consequently, there will be little or no room for round-tripping and forex hoarding, unless CBN management also compromises itself in such scams.
With this arrangement, the CBN will no longer formally auction dollar rations against Naira, the Naira will therefore sell at an equilibrium rate and there will be no need for the CBN or the DSS to pass the blame for forex malfeasance to the BDCs or even raid or harass them. Incidentally, the fuel market also will be readily deregulated, as Naira improves.
Save the Naira, Save Nigerians!
