FX regulation and manipulation: The threat, opportunity to Nigeria’s economic stability

The monetary authority is saddled with the responsibility of preserving the external reserve to safeguard the international value of the nation’s legal tender currency and ensure price stability. This task makes the Central Bank of Nigeria responsible for reserve management and exchange rate stability, as enshrined in the CBN Act, 2027. Intriguingly, Nigeria has the […]

The monetary authority is saddled with the responsibility of preserving the external reserve to safeguard the international value of the nation’s legal tender currency and ensure price stability. This task makes the Central Bank of Nigeria responsible for reserve management and exchange rate stability, as enshrined in the CBN Act, 2027.

Intriguingly, Nigeria has the highest foreign reserve in Africa, after Algeria and South Africa, but its currency is ranked 27th in Africa. Though, other economic variables may explain otherwise, but the ability to intervene in the market is usually the function of FX availability.

Last year, in August, JP Morgan Chase, the custodian of the nation’s foreign reserve, raised a question as to whether the country has up to $33.12 billion, considering securities lending ($5.5 billion), foreign currency forwards ($6.84 billion) and currency swaps ($21.3 billion) contracts. The private entity concluded that the foreign reserve had fallen to a net balance of $3.7 billion at the end of 2022, which CBN refuted as “presented out of context”.

In addition to the above, the International Monetary Fund (IMF) in February 2024, predicted a decline in the Nigerian foreign reserve to $24 billion in the current year. While on April 15, 2024, the reserve declined to $32.29 billion, losing about $2.16 billion within a month.

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The recent policy changes and unstable exchange rates underscore the need to delineate naira stability beyond the traditional monetary tools and fiscal methodologies.

To make meaningful progress in the present quagmire, it’s essential to accurately identify the primary sources of FX. like capital importation, export proceeds, interbank sales, domiciliary accounts, and foreign remittances. The sources are crucial to any economy, but in the Nigerian context, all are either partially or entirely encumbered.

They became less relevant over time due to the evolving patterns and advancement in digital technology, coupled with globalisation and trade liberalisation. Consequently, the CBN has limited control over the flow and direction of these sources.

Focusing on oil export proceeds — the primary source of foreign exchange in Nigeria accounting for about 90 per cent of the nation’s foreign exchange earnings — is now entangled in multiple oil forwards and swaps contracts. Such contracts had mortgaged the future of our country, as massive amounts of oil are sold in advance. While we give up on the proceeds of crude oil sales as we lack control over what our predecessor accomplished.

The simple reason is that these contacts are so interwoven and crafted with international firms’ involvement, within a legal sphere that no power can stop. For instance, the $3.3 billion oil-for-cash contract secured by NNPC Nigerian National Petroleum Company Limited (NNPCL) on August 16, 2023 involved Afreximbank and Project Gazelle Funding Limited, a company incorporated in Bahamas.

According to The Cable, NNPC is required to prepay future royalties and taxes to the federal government whereas the country pledged to repay the loan with 164.25 million barrels of crude oil (90,000 barrels per day).

Another way to understand the impact and complexities of the oil contracts in Nigeria was when Dangote planned to import two million barrels from Trafigura Group for his 650,000-per-day capacity refinery.

To delve further into the matter, the effort of CBN to receive oil proceeds directly into the federation coffer was in vain, despite the struggle of two embattled consecutive CBN governors.

Capital importation, whether in the form of Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI), is contentious in the Nigerian case. Nigeria persistently seeks FDI in many official tours. However, whatever comes as FDI is utilised by the foreign company to import machinery, raw materials, and consumables to run the project locally, leaving only a meagre sum for operating costs in Nigeria. Meanwhile, repatriation of profit is never done entirely through official windows.

Thus, most FDIs’ activities support the parallel market which consequently affects Naira stability while the companies operating in free trade zones are exempted from many FX regulations.

Conversely, FPI in Nigeria is subject to significant manipulation as banks, securities and investment firms, and treasurers have learned to exploit the arbitrage that exists in the market.

As FPI arrives, a well-planned scheme is put in place to repatriate dividends, interest incomes, and matured initial investments, using the capital importation certificate as a shield. While inflow from foreign donors (e.g., WHO, USAID, UNICEF) has long been controlled by agents who intercept the funds and settle their counterparts in Naira.

On another front, foreign remittances are no longer a stable source for Nigeria because the FX market is so liberalised that even a local farmer is aware of the dollar’s fluctuation, let alone Nigerians overseas.

Thus, it’s self-deceptive to consider foreign remittances as part of FX sources needed for market liquidity, particularly in the face of ever-increasing activities of International Money Transfer Operators (IMTOs) and FX operators in the present digital world.

These fintech firms provide more accurate and transparent FX rates with comprehensive market information as their market reflects real demand across board. Owing to their service flexibility and instant intermediation, they are now more preferred than MoneyGram and Western Union.

Diaspora remittances of Nigerians amounted to approximately $20.13 billion in 2023, and 90 per cent of the funds did not reach the country due to truncation by these IMTOs and other Fintech firms.

Local operators and BDCs pursued by law enforcement agencies play a minor role of intermediation in the market. The real players providing Naira settlement will remain unseen, despite the damage they inflict on the country. Even as security agencies target Binance executives, IMTO executives are merely advised to “mute their mics.”  This raised suspicions about the sincerity of and real intentions of the entire business of Naira stability.

While I choose to remain silent on Interbank and domiciliary account purchases, the authority still needs to understand how FX transactions are matched by the authorised dealers. In a nutshell, the complex activities in the FX market could not be managed effectively with traditional monetary tools at the Bank’s disposal.

The physical law enforcement intervention to deter participants in the parallel market is limited to what is visible. The clampdown on Binance executives, just like Aboki FX, did not yield much results because of the failure to understand what the platform entails. As a trading platform, it brings together buyers and sellers of cryptocurrencies and stable coins like Bitcoin, Ethereum, USDT, and USDC thus, assisting in settling transactions in whichever direction they flow.

In simple terms, Binance as a platform does not transfer FX sourced from the Nigerian FX market to foreign countries. Therefore, in real terms, what Binance executives and street BDC operators do to the economy is an effect, not a cause.

Expert reports on cryptocurrency transactions in Nigeria show that the $26 billion Binance transaction escalated by CBN was just the tip of the iceberg compared to the estimated $500 billion peer-to-peer (P2P) cryptocurrency trading undertaken by Nigeria mainly through WhatsApp, Telegram, phone calls, joints, and other business gatherings.

CBN as a regulator in the FX market and the custodian of foreign reserves, the monetary authority can only play a vital role in stabilising FX with adequate FX resources and full control over the players in the market. The two fundamentals had changed rigorously with the massive corruption, money laundry and advancement in financial technology.

In brief, the depletion of the foreign reserve was caused by changing patterns of international trade, institutional changes in the economy, and structural shifts in production.

Therefore, the best step requires taking the bull by its horns and holding the real perpetrators accountable. This involves backward identification of the sources of Naira sold for FX. These steps would unveil the power beneath the veils, ranging from bank executives, IMTOs promoters, state governors, senators, large contractors, oil magnates (beneficiaries of SWAP and forwards contracts), heads of MDAs, and their appointed proxies.

For meaningful results, the investigations should cover current and former officeholders. While in the interim, the same placard should be given to these perpetrators to hold at the EFCC level to demonstrate fairness and commitment on the part of the government.

 

Ahmad, PhD, FCA, wrote from Abuja