This Article appeared first in the 2016 Magazine of the Nigerian Economics Student Association (University of Ilorin Chapter). Image Credit: Central Bank of Nigeria
Foreign exchange is the exchange of one currency for another, or the conversion of one currency into another currency. It also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as “forex” and occasionally as FX. Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion naira payments made by corporate giants and government for goods and services purchased overseas. The exchange rate regime in Nigeria can best be characterized as intermediate between fully managed and freely floating regimes. At the official market, Nigeria operates a fixed exchange rate but at the parallel market, the exchange rate is determined by the demand and supply of foreign currencies.
There were mixed reactions when the Central Bank of Nigeria decided to stop forex supply for the importation of 41 items. According to the CBN, for as long as we continue to import these items, local producers will suffer. But ‘the economist’ however stated that “the logical thing to do was to devalue or float the naira to encourage realistic demand for forex rather than an outright ban on allocation”. But for how long are we going to continue devaluing our currency? Some of the items on the ‘exclusion’ list are; rice, cement, woven fabrics, tomatoes and tomato pastes, soap, cosmetics, metal products such as roofing sheets, wheel barrows, head pans, etc. Nigeria’s forex restriction policy prior to lifting some of it are:
- The CBN will no longer sell forex directly to Bureau De Change operators in the country.
- Ban on importation of 41 items including toothpicks. Importers of these items will no longer access foreign exchange from the CBN, banks and Bureau de Change.
- Reduction in the limit on usage of Naira debit cards abroad. From $150,000 per annum, the limit was pegged at $50,000 per annum per naira debit card.
- Daily cash withdrawal limit was pegged at $300 abroad.
- Ban on acceptance of foreign currency deposit into domiciliary accounts. A domiciliary account is an account that allows you save in foreign currencies, with your money valued at the prevailing exchange rate.
The CBN then advised individuals that wish to source foreign currency for eligible and legitimate purposes such as Business Travel Allowance, Personal Travel Allowance, medical, mortgage, school fees, goods, etc, to do so through recognized channels with the use of Form ‘A’ for “invisible” and Form ‘M’ for “visible” transactions.(www.bellanaija.com/2015/08/cbn-bars-banks-from-accepting-foreign-cash-deposits-into-domiciliary-accounts.)
The CBN however believes that Nigeria cannot attain its full potential by importing anything and everything, saying the trend has weakened the operating capacities of Nigeria’s industries.
However, due to the mass protests and criticisms, the CBN later advised importers of the banned items to source their foreign exchange elsewhere. As a result, people started patronizing BDC operators. And since BDC operators in the country also can no longer freely get foreign exchange but from money laundered by politicians, etc, they decided to increase the cost of obtaining one dollar.
These restrictions coupled with the dwindling foreign currency inflow due to continued decline in crude oil prices, as well as continued expectation of further devaluation of the naira, led to a consequential depreciation of the naira in the parallel market. The parallel market exchange rate of the naira rose from N179/ N185 at the beginning of 2015, to close the year at N280 to a dollar ( naija247news.com./2016/01)
With the ban on the use of naira master card outside the country, Nigerians would be saved the spend thrift character which they exhibit when the travel abroad. According to a report on vanguard newspaper early January, Nigerians spend an average of $100 million a day on expenses abroad. Also, according to one of senator Ben Bruce facebook posts, GLO Nigeria pays a whopping sum of N600 million every year to Manchester united. What happens is that as naira debit cards are swiped abroad to pay for one thing or the other, visa or master card institutions contact Nigerian banks for payment in foreign currency and the commercial banks in turn run to the CBN to demand for foreign currencies. The CBN then pays from the country’s external reserve. As this continues, the foreign reserve will continue to deplete, and demand and supply tells us that whenever the supply of a commodity is greater than its demand, then that commodity is bound to lose its value.
One thing for sure is that it is easy to spend money using debit cards as long as there is money in the account, the temptation of spending money on what could easily be foregone if one does not have cash is easily very high.
But if those who travel abroad use cash traveler’s cheque which have limit, their expenses will reduce. Again, the idea of the CBN controlling the exchange rate is not a bad one because if we allow the market to determine the exchange rate, then the rate of exchange of naira to dollar will go as high as N500, knowing fully well that Nigeria still relies mostly on imported goods and services. If you are in need of dollar, why not go to through the procedures laid down by the CBN instead of putting pressure on the BDC operators in the country, which then contribute to a higher exchange rate of naira to dollar.
SHORT RUN EFFECTS OF FOREX RESTRICTION
1) The rate of exchange of naira to other foreign currencies increase in the parallel market.
2) As a result of the above and because we rely mostly on imports, general price level increases.
3) The citizens are made to be prudent when they leave the country for vacation and the likes abroad.
4) Foreign reserve begins to increase.
5) The people will begin to look inwards by patronizing local products at the expense of expensive imports.
LONG RUN EFFECTS OF FOREX RESTRICTION
1) The country becomes self-sufficient as a result of looking inwards and patronizing local products.
2) As a result of self-sufficiency, naira begins to appreciate relative to other currencies.
3) The economy is diversified
4) Competition on the supply side of the product market makes the general price level to be moderate. When prices increase in the short run, sales level will reduce. This will make the people to realize the need to look inward-using local resources for production. As a result of competition, prices of goods and services will become stable in the long run.
John Maynard Keynes once said “in the short run, we are all dead”. How true is this statement in this instance to the Nigerian economy? If we consider that statement, it means the CBN should not impose forex restriction because it is a long term solution, and we should continue procrastinating. In the cause of procrastinating, things will become worse. Why not face these short run effects now so that even if we are not able to reap the pain now, in the long run, our future generations will enjoy it. At least, Rome was not built in a day. We keep looking for magic and magicians to turn our devastating economy around, but we ourselves are not willing to make any sacrifice.
Although, the controversial restriction on forex supply has made some of those import very expensive and uncompetitive compare to Nigerian products, we must think of ways to make this sustainable. The tendency in Nigeria, as we all know, is that as soon as oil prices recover and the country’s reserve position improves, we tend to forget where we are coming from, we throw caution to the wind and return to an unsustainable lifestyle. We need to re-examine our tastes and priorities as our own contributions to national development. It does not make any sense for us to be consuming foreign products at the expense of made in Nigeria. We need a new orientation altogether (THE PUNCH 18TH MARCH,2016).