I will try my best to make this article as accessible as possible so I can reach a wider audience in hopes that we can collectively persuade the government to repeal the porous, reckless and fraudulent Foreign Exchange (Monitoring and Miscellaneous Provisions) Act of 1995, and for the Central Bank of Nigeria (CBN) to change its cash policies on foreign exchange. These two forces have together dragged this nation into recession with no hope of getting out.
I have looked at the data from CBN, NBS and World Bank. From these data, I have come to strongly believe that the fall in oil price is not the cause of Nigeria's recession. We have actually sustained the economy in the past with lower prices than what we have now. Rather, our recession is a result of the diversion of the forex needed to settle import bills to the feeding of our domiciliary accounts, black markets and the creation of the avenues through which corrupt officials convert stolen public funds, which are then subsequently hoarded.
There are two things that have made it possible for our government to successfully divert the fore: 1) a law that legalizes domiciliary account ownership and 2) a foreign exchange policy of cash dealership.
The first is a law that deliberately created the avenues to hoard and enlarge the demand base for foreign currencies through personal domiciliary account ownership.
The second is the CBN’s foreign exchange management through cash forex dealership and the sales of cash forex to banks and the Bureau de Change that feeds domiciliary accounts, which starves the economy of forex.
The above two work hand in hand in plunging the Nigerian economy into recession. Of these two, the major player responsible for our recession is the CBN’s willingness and role in doling out cash forex inside Nigeria. This is because without cash forex, domiciliary account ownership will be useless.
Our reserves are now being used to service domiciliary accounts, sustain the forex black market and provides avenues through which stolen money is laundered out of the country. It is unfortunate that the laws surrounding foreign exchange are such that stifle our import industries that import raw materials to feed local production but make it easier for corrupt individuals to acquire.
While Nigerians might be happy that we as individuals have the rights to domiciliary account and forexes, corrupted individuals, government workers and politicians are using the back door of domiciliary account ownership, which they have created, to siphon and launder stolen funds out of the country and/or store the funds in their private homes.
CBN Governor Godwin Emefiele, when asked in an interview with ThisDay news about how much money is in private individuals’ domiciliary accounts, he said about $1billion. That was in April last year. By March this year it grew to over $20billion. Remember, this is not electronic money, but cash dollars.
And where did individuals get these dollars? Of course, from the same dollars the CBN has been injecting into the economy in an effort to stabilize the naira. You can clearly see that our reserves are not being used to fund economic activities, as they should. While the CBN is busy doling out forex to supposedly help the economy, stolen funds could, and are, be used to acquire these forexes and stash them away in domiciliary accounts and in places beyond the reach of the CBN, thereby reducing its ability to properly affect variables targeted in its policies.
On the one hand, I laud and applaud the bank and its MPC (Monetary policy committee) encouraging Nigerians to go cashless, but I am utterly confused on the forex front where the bank is busy doling out forexes in cash to dealers and BDCs.
On the ownership of domiciliary accounts, in 1995 the judiciary made it a law that allowed individuals access to domiciliary accounts and this law amazingly protects account owners from disclosing their source of funds (forex). This law is found in the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995.
The CBN foreign exchange management and this Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 has plunged the economy into recession by not only creating and enlarging the demand base of forex through personal domiciliary account ownership but also by indirectly diverting forex meant for economic intervention through the direct sale of forexes to dealers/BDCs (Bureaus de Change).
All Nigerians are entitled to know the implications of laws made in Nigeria, especially laws that authorized banks to open domiciliary account for individuals, companies and organizations. According to chapter f34, paragraph 17, section 1 of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995, individuals are not only permitted to open domiciliary accounts but also allowed to buy their forex as they wish in cash and, amazingly, are by law not required to disclose their sources of forexes.
I honestly could not believe my eyes when I was reading the provisions of this law. This is not leadership, this is carelessness, and a blatant show of irresponsibility and the subjection of Nigerians to a great unnecessary pain and suffering. A careful look at the CBN’s Foreign Exchange management and this 1995 act reveals how porous and reckless the system is. It seems it's a deliberate set up to encourage corruption and acts as an avenue to siphon public funds in hard currency and depress the economy.
I have contemplated on why the government (judiciary) would want ordinary Nigerians to own domiciliary accounts in the first place but could not see any tangible reason. It is not a fundamental human right. The only good thing about private domiciliary accounts ownership in Nigeria is that the CBN is totally removed from participating in the corruption that accompanied such laws by transferring it to the commercial banks.
The Central Bank of Nigeria, through commercial banks, could easily provide the services a domiciliary account provides with a naira accounts and as a result eliminating all the corruption, inefficiency, hoarding of dollars, and not to mention the negative impact of forex speculations by domiciliary accounts holder which is a major headache to CBN because of the pressures it also exerts on naira.
This system the CBN is using to manage foreign exchange and economy is synonymous to feeding a dog in the midst of wolves. Of course the wolves will feed on the dog and its meal. Just throwing cash forex into the economy is the most reckless policy I have ever seen. That's why our foreign reserve is depleting so fast. Nigerians are now storing value in our local banks using foreign currencies to the point that our banks are saturated with forexes. We can all remember that some time last year the banks refusde forex deposits by domiciliary account holders because their vaults were filled with forexes.
This system does not only lead to corruption, it aids and abets corruption. It also leads to unaccountability, depreciation of our currency, dollarization of our economy in the long run, unsustainable intervention, unhealthy speculation, indirect funding of the parallel forex market (i.e., black market), recklessness and depletion of our foreign reserve which has subsequently lead to our recession. I am never surprised that we are in recession because if a country wants to get itself into recession those are the steps to be taken.
The most astonishing thing is that no one has ever seen a situation where a country’s reserves falls concurrently with surplus trade balances. Nigeria's trade balances have always been in surplus. According to data from National Bureau of Statistics (NBS) between 2008 and 2015, Nigeria had trade surpluses consistently. Adding theses surpluses together came up to #61 trillion. Using the CBN's wDAS/rDAS average exchange rate (2008-2015) of $155, #61 trillion will give us $393.5billion worth of surpluses. The question now is where has all the surpluses gone? According to the data from the CBN database, in 2008 our reserves stood at about $64.2billion. In November 2016, it came down to
Given the above data, our reserves should be on the increase. To put this in perspective, think of a family that earns more than it spends, and yet its savings keep depleting. Given our trade surpluses, we should expect to see a positive linear progression in reserves acquisition accompanying consistent trade surpluses. But it is a paradox that regardless our reserves keep falling.
Dealership in cash forex gives incentive to launder stolen public funds by making forexes readily available. We are already inundated by recent unending arrests made by the EFCC and SSS and the amount of recovered "Cash" forexes stashed away in private homes running into several hundreds of millions. Even the state governments seem to be hoarding forexes. The most recent case points to invasion of the government house in Akwa Ibom, where stockpiles of dollars were found locked away in a room. These are the ones we know about, we don't know about the ones we don't know about. If foreign exchange is meant to facilitate economic transactions, what are they doing in private homes?
The ultimate questions are: Why would the CBN sell forex to the banks and BDC at an extremely low price and expect Nigerians to buy it a much higher price from them? Why does the bank and government allow cash forex to be traded like a commodity inside Nigeria knowing fully well the
corruption that comes with it, that we don't have the institutional capacity to enforce the rules and regulations of such systems, and that we will never be able to adequately supply it? This is bad economics.
Just take a walk to every major hotel in the city center of most states you will see hundreds, if not thousands, of Nigerians trading cash forex. We should remember that in other to stabilize the naira, we should not create demand for forex more than is needed. But by allowing all Nigerians access to
domiciliary accounts and dealers the rights to buy forexes in cash from the bank, the bank has broadened the demand base of forex, which will add to the pressure and further depreciate the naira, which is not good for the economy. Also remember that the main and only objective of foreign exchange is to provide forex for economic activities only, but creating demands for forex beyond what is required for Nigerians to pursue economic activities depreciates the naira and has propelled the economy into recession.
Our current problem now is that the naira is depreciating and losing value so fast that it makes the heads of Nigerians spin uncontrollably. And as a result, prices on the local market are spiraling out of control on a daily basis. Especially food prices, because most of the things we consume are
imported. We are currently in recession, as it seems everything in our markets is tied and affected by forex. And given the long time this situation has lasted, I can tell that the CBN is hopeless and out of ideas on how to tackle this menacing problem.
I wish to remind everyone that according to CBN, its objective of foreign exchange rate management in Nigeria is to ensure price stability, the preservation of external reserves so as to defend the external value of the naira, the diversification of the economy, by encouraging non-oil exports, and narrowing the premium between the official and parallel BDC rates. In all these, the bank has failed. I believe that if I show Nigerians the problem and also show them the solution, we will be moved to act. That is why I have suggested the way out in a separate article published a few days back by Vanguard.
To recap the salient point of the above articles:
To solve Nigeria's economic recession starts with repealing those laws, going cashless with forexes, and closing all domiciliary accounts in the country. After repealing these laws, the apex bank can and should start using naira accounts to make international transactions so Nigerians would have no
need for a domiciliary account in the first place. In other words, all international payments must go through it. This is the most efficient and responsible way forward.
There will be no need to inject all those billions of dollars it has been injecting into the economy to stabilize the naira. The bank can use this forex to settle bills on the international front from naira transactions by Nigerians. In other words, Nigerians should be able to walk into commercial banks and conduct international transactions using their naira accounts. I suppose we are all aware that the black market only thrives with cash forexes, therefore going cashless with forexes will not only render the parallel market redundant, it will reduce all the inefficient bureaucracy associated with making transaction in foreign currency, it will take speculators out of business, and block the avenues in commercial banks through which stolen funds are laundered out of the country.
This is the most responsible and civilized way to improve the Nigerian economy. This will improve accountability and transparency and provide the apex bank with more information to adequately clamp down on illicit transactions because with time, the CBN will have enough data to form a trajectory of foreign expenditures. And a deviation from usual transactions could easily be detected and identified. This will put the CBN on the forefront for the fight against money laundering and corruption it has always preached.