FX Scarcity: The naira as an article of financial speculation

The journey from a currency of pride
Securing approval for his request for business travel allowance (BTA) was supposed to be a big deal for Calvin Irene. His journey, due to hold in the middle of August, was his third business trip to San Francisco in less than a space of 12 months.

For his first trip, he turned up at the bank too late for the flight date, his banker told him. That informed his decision to call early ahead of his second trip, but approval failed.

Irene, an integrated communications marketing consultant with a firm in Abuja, funded his two trips with dollars sourced from currency traders. He was already used to the overpriced black market deals.

Two days before his trip, the hope of getting foreign exchange (FX) at the official N430/$ rate, or thereabout, was as elusive as the first day he visited the bank. A day before his flight, he sealed a deal with two black market dealers for $4,500 he had requested and paid about 60 per cent premium. He got the dollar he needed for his trip, but at a cut throat rate.

During the same period, Tayo Bode, a Lagos-based branch operations manager of a tier-one bank, was scheduled for a fully sponsored vacation to Portugal, where he was not meant to pick any bill or spend dollar (but euro) since the trip was paid for.

But the idea of making some ‘bucks’ from personal travel allowance (PTA) suddenly came up. Bode, according to his account, had no money to spare on dollar, but he applied for PTA from a purely business perspective. So, he had to fund his naira account with an equivalent of $4,000, the maximum amount an individual is entitled to per trip.

“In less than an hour after I cashed $4,000, I exchanged $3,000 at a black market rate and returned the money I borrowed. I was left with $1,000 and about N300, 000 as my profit,” the banker disclosed.

Irene needed FX for a crucial business meeting that could add value to his industry as well as the economy, but was not successful and had to pay a black market price for the amount he could secure from the official window.

But Bode had no need for dollar but long-throat offered him an opportunity to profiteer from the wide market arbitrage, which is currently estimated at N280 per dollar.

Indeed, it is different strokes for the two different folks. The two experiences are a telling reflection of the frustration of Nigerians, a demonstration of the failure of FX market and the inefficiency of policy options created to rein in the historical dollar crisis.

The rise of rent seeking
BTA/PTA window has become a lush business for thousands of Nigerians. At N280 per dollar market arbitrage, an individual realises as much N1.1 million ‘profit’ from either a real or phantom trip. Half of the kickback can cover return tickets to dozens of countries that qualify for BTA/PTA. And thousands of Nigerians, who are hard pressed to make extra income to survive the hard economy, are leveraging the opportunity weekly.

As thousands file for BTA/PTA daily, banks are increasingly running out of supply and ability to fund the most genuine claims. Last week, a first tier bank informed its customers that BTA/PTA proceeds would henceforth be transferred to the their Travel Card. Other banks are exploring different options for dealing with the pressure from the requests.

The widening premium on the black market rate is often seen as a cause and effect of the inefficient FX management framework, dating back to the experimentation with the Structural Adjustment Programme (SAP) in the 1980s.

Economists, including Dr. Muda Yusuf, Dr. Ayo Teriba and David Adonri, have seen the differential as one disincentive to foreign capital inflow and advised that the official segment must necessarily be allowed to achieve a dynamic equilibrium to restore stability.

The International Monetary Fund (IMF), which pegs the maximum arbitrage between official and unofficial segments at five per cent, and the World Bank, have, on different occasions, called on CBN to embark on broad-based reforms to reduce rigidities in the FX market and make the local market more attractive to foreign funds.

But responses from the CBN Governor, Godwin Emefiele, and other executives border on the supply shocks and the potential spiral should the apex adopt a clean float.

Historically, the bank has adopted a gradual devaluation in attempts to close the market gap that has opened the space for all sorts of manipulations and rent-seeking behaviours. But each time naira is re-pegged, the black market exchange rate, which the apex bank has dismissed as not a reference value of the local currency, also adjusts.

In 2014, when the CBN rate stood at N155/$, the black market was about N180/$ putting the premium on the alternative market at about N35/$. The monthly moving average (MA) of the differential had surpassed N45 per dollar at some point when the official rate was adjusted to N197/$.

This is the bane of rapacious rent seeking in the currency market. The former CBN Governor, Sanusi Lamido Sanusi, exposed the depth of this challenge at a seminar, which he attended as Emir of Kano.

“With my background in the banking sector, and now a royal father, I can sit in my garden and make billions through the forex market without a sweat. This is how most of those you call billionaires made their money,” the ex-banking regulator had said.

The beginning of an unending era of debauchery
NAIRA has gone through a debilitating history and experimentations that have left it weaker, less of a store value but more of an article of financial speculation. Intertwined with the sore history is a litany of policy gambits that only mirrored more of the whims of external factors than they reflected the peculiarities of the local market. At best, the management prescriptions were half-implemented or abandoned at the realisation of their inherent flaws.

As part of the SAP package, the Second-Tier Foreign Exchange Market (SFEM) was introduced in 1986 as a necessary option for achieving a dynamic equilibrium, as the first-tier market operated by the government was fraught with the usual rigidities and politicking. The era only succeeded in institutionalising the current parallel market and speculative currency trading.

Oftentimes, experts, including a former deputy governor of CBN, Prof. Kingsley Moghalu, have argued that a stronger currency does not necessarily produce a stronger economy. Perhaps, in the real world, the textbook argument is relevant to the extent the local industrial sector is vibrant and competitive.

As part of efforts to rein in a falling naira, the Autonomous Foreign Exchange Market (AFEM), a replica of SFEM, was introduced by the military regime of late Sani Abacha as a window to sell FX to end-users at a market-determined rate while the official rate was pegged at N22/$. But AFEM could not meet the ever-growing FX demand as the mono-economic culture constrained earnings. Rigidities increased while round-tripping became a norm, pushing black-market trading popularity to a height not seen before. Banks were increasingly ‘ingenious’ in their dealings with the CBN, alternately becoming the major players in the black market.

Dr. Joseph Sanusi came with the Interbank Foreign Exchange Market (IFEM) as the country, as it has become in recent history, sought a more liberal FX management model. This happened when a dollar was trading on the black market for over N80/$ while the official exchange was N22/$, with a market arbitrage of over 260 per cent. With such a wide margin, currency trading was to become the most lucrative operation in the financial circle. The CBN threatened but did nothing radically different from what had become the norm. Politicians also joined in the fray to reap from the windfall.

The upward review of the official exchange rate only narrowed but did not close the market differential to rein manipulations and other anti-market practices. As pressure on naira continued with a huge debt overhang amid growing official graft, the CBN suspended IFEM and capped the margin banks could sell, much like today’s retail market.

But the banks were smarter. The control gave birth to other manipulative tendencies. Some of them introduced what was then knowns as ‘the Nigeria Inter-bank Settlement System (NIBSS) and Draft’, a scheme that allowed one to pay the CBN-approved rate through NIBSS and settle the balance with a bank draft – a win-win backdoor approach that effectively beat regulation. Round-tripping ballooned while banks officially rewarded smart ‘round trippers’. There were speculations that some individuals acquired cheap banking licences with their eyes solely on the ‘opportunities’ in the FX business. This continued until the famous Soludo recapitalisation.

The subsequent oil boom was like a circuit breaker in the historical effort to achieve a workable FX management approach. The oil boom, buoyant external reserves and huge excess crude account (ECA) provided a sense of security, which gave Prof. Chukwuma Soludo, the current governor of Anambra State, some headroom to liberalise FX and expand the items that could be funded. Funding was no longer limited to the importation of raw materials and inputs but extended to finished goods, education and medical trips. The expanded official funding widow made the black market unattractive. For once, naira gained against the dollar without any deliberate effort to strengthen it.

When Soludo assumed office, naira was trading near N130/$ but went up to N115/$ at some point. But he left it at N148/$.

When there was a shock in FX supply during the 2008 oil price crisis, Nigeria had a sufficient buffer in the external reserves (which was around $65 billion) to weather the storm. But then, Soludo took what had become a predictable path – he created some scarcity measures to support devaluation, as some experts had suggested.

The post-Soludo FX liquidity was driven by hot money. After the exit of Chief Olusegun Obasanjo as President, oil prices were high but the country was not building its reserves. Sanusi Lamido Sanusi, who restored the interbank and introduced the Wholesale Dutch Auction System (WDAS), needed enough dollars to stabilise naira and sustain confidence. What did he do? He removed the one-year restriction on foreign investment in government bonds. That opened the floodgate for hot dollars and heightened the volatility of the reserves. Fortunately, there was no major shock as the oil market remained bullish, providing respite throughout that era. Throughout Sanusi’s stay, naira only fell by a margin of $16/$ – from $148/$ to N164/$.

But for the effect of the Russia-Ukraine war, the international oil market had been bearish for much of Emefiele’s era. The country’s external reserves have dropped significantly from its all-time high. In response, the CBN removed 41 items (43 later) from the official FX funding list, which has increased the pressure on the parallel market. This intensified with the stopping of weekly funding of bureaux de change (BDCs), which Emefiele accused of market manipulations.

For over two years, COVID-19 has compounded the systemic risks. For instance, diaspora remittances dropped by 23 per cent in 2020 (from $23.81 billion to $17.21 billion) only to increase to $19.2 billion last year. Perhaps, the ‘Naira 4 Dollar’ Scheme introduced by the CBN to boost official remittance receipts triggered much of last year’s increase, which still put the figure behind the pre-COVID-19 record.

Last year, capital importation also slumped to a five-year low of $6.7 billion and 31 per cent decline from $9.7 billion recorded in 2020. Yet, dollar demand pressure continues on the upward trend with trapped foreign capital in the stock market alone hitting $5 billion last year. As at July, foreign airlines’ revenues trapped in the country owing to FX illiquidity was estimated at $465 million, a challenge that almost halted their services until the apex bank released a relief of $265 million.

Policy dilemma and neo-liberalists’ demand
LEANING on a distressed past, the future of macroeconomic indices connected to FX outlook is bleak and beclouds forward-looking data. Political risk, for instance, is on the rise while insecurity spirals out of control amid infrastructure challenges. Amidst the illiquidity crisis, IMF, World Bank and some neo-liberalists have called for reform of the FX market. Some of the arguments are that the market would reduce the rigidities and arbitrage that have restrained capital importation.

“The current market creates disequilibrium. Until we can achieve equilibrium, there may not be stability. And to do that, we need to liberalise the market so that an individual can come to buy and sell at a market price like every other trading platform,” an economist and stockbroker, David Adonri, had argued.

Dr. Ayo Teriba, another economist, also told The Guardian that any policy option that falls short of creating dynamic equilibrium would fail. But Dr. Tope Fasua, a former presidential candidate, warned that liberalising FX in the face of a wide gap between demand and supply would push the local currency to “a highway” and trigger a spiral the economy may never recover from.

In the first five months of the year, the apex bank spent $7.6 billion defending the value of naira at the Importers’ and Exporters’ (I&E), a pseudo-market window where the value is kept artificially low.

Apart from the regular intervention, the CBN also pays exporters to repatriate proceeds of their overseas transactions through the window as against selling on the black market. With the rebate (Non-oil Exports Proceed Repatriation Rebate Scheme), one of the five pillars of the RT200 FX Programme, exporters earn 65 for every $1 repatriated and sold at the I & E Window to authorised dealers and banks (ADBs) for third party use and N35 for every $1 repatriated and sold in I&E for own use on eligible transactions. In the second quarter (Q2), the CBN paid out N20 billion to eligible exporters as it struggled to expand FX earnings.

“We found out that there has been a lot of export, and those exports were found to be eligible to have rebates, which were in the tune of over $600 million and that is the reason we are paying slightly over N20 billion during the second quarter. We are very happy and delighted that a lot more people are embracing export in Nigeria and as a result of the incentives that we are providing, the incentives that are being paid promptly, revenue export earnings are increasing.

“And we had hinted that at some point, we will get to a point where the banks will not even need to come to the CBN to buy foreign exchange to meet the important needs of their customers,” Emefiele said while justifying the scheme. In essence, the CBN had hoped to generate $200 billion in FX earnings from non-oil sources in the next three to five years. Export of semi- and fully-processed products as against raw commodities is considered critical.

Sadly, CBN’s efforts are blighted by the wide margin between the I & E window where experts earn less than N500 per dollar (inclusive of the rebate) and the parallel market, where they could get N710/$. Exporters are also grappling with other constraints, including port inefficiency, high cost of production, poor infrastructure and others, which could be better addressed by the fiscal authority and other agencies. The RT200, however, contemplates other initiatives to support non-oil export growth. Three of the critical pillars targeted at bridging the infrastructure gaps – value-adding exports facility, non-oil commodities expansion facility and dedicated non-oil export terminal – are yet to come onboard.

There are debates on not only the efficiency of the CBN’s efforts to increase FX earnings but whether the initiatives, especially the rebates, are not counter-productive.

A professor of applied economics, Godwin Owoh, for instance, sees the apex bank’s idea of expanding the money supply level of the rebates, as a challenge that could potentially worsen the pressure on the naira and inflation.

“The CBN needs to explain where the rebate is coming from other than printing of money. You cannot embark on an excessive increase in the supply of money when the country is grappling with high inflation and currency crises. That is an invitation to chaos,” the economist argued.

The opportunity cost of a stronger naira
ONE of the costs of keeping the naira from hitting “the highway” is a dwindling external reserves. Earlier in the year, a leading Nigerian economist, Bismarck Rewane, projected that the CBN could spend as much as $10 billion defending the tumbling naira this year. In the first five months of the year, 70 per cent of the amount was frittered away, the cause of sustaining the artificial value of a local currency. That has huge implications for the country’s foreign reserves, which have a positive correlation with the country’s investment outlook.

As at September 15, the country’s reserves had lost 4.5 per cent on a year-to-date (YTD) basis. Last year, the figures closed at $40.25 billion but had dropped to $38.69 billion. Historically, periods of stable FX also marked the least volatile FX market in the country. Nigeria had the most stable external reserves from 2007 to 2008 with the figures hitting the highest point on September 8, 2008, when they stood at $64.85 billion. It dropped consistently since then to about $24 billion in late 2016. There was an uptick in 2019 but the figure has not reached $50 billion since its heydays.

Nigeria’s external reserves have taken a 40 per cent haircut from its all-time high (ATH). Yet, since 2008 when the country recorded the most bullish foreign exchange reserves, the country’s import bills have tripled. In 2008, the value of Nigeria’s imports was about N6 trillion. The figure hit N20.8 trillion last year. With the provision of the CBN Act (2007), which recommends 24-month-import-cover reserves, Nigeria is already in the red. But more recent prescriptions recommend a six-month cover, suggesting that the reserves provide sufficient cover since they could clear off estimated nine-month import bills if last year’s data are a sufficient guide.

But as suggested by Adonri, the most challenging issue about the reserves has more to do with their volatility rather than their sizes. He warned that a large portion of the buffer comes from short-term sources, which makes the outlook more frightening than the data suggest. In recent years, a bulk of capital importation is made up of portfolio investment and other short-term sources, which are less stable. These have largely reflected in the volatility of the external reserves.

While the reserves are falling or stagnating, at best, the demand for FX, both real and otherwise, has ballooned. Investigations suggest that banks struggle to meet the demand of a tiny percentage of those who apply for dollar with thousands of end-users having to visit the equally-illiquid black market as last resort.

Overseas students, who are entitled to $15,000 each for tuition per session, and their parents are majorly caught in the web of FX scarcity. Investigations suggested that some students waiting to get FX to pay their tuition are currently stranded abroad. The banks are pressurised to change their operational processes and timelines as the crisis lingers.

“To serve you better, please be informed that we now require six to eight weeks to process your FX needs for international school fees, upkeep and medical payments. This will enable us to review your requests in line with regulatory requirements and ensure that we can source for FX to fulfill them,” an email sent by a bank said.

With diminishing capital inflow as well as increasing requests, there are concerns about how the CBN, which insists that there is sufficient FX for Nigerians with genuine needs, intends to meet the demand without overreaching the reserves. Thus, a section of the market has called for an urgent review of the current FX management template to reduce the demand pressure.

While the World Bank and its supporters have called for the waiver of the 43 items blacklisted from accessing the official FX market as part of its campaign against trade restrictions, Fasua said more items would need to be included to save the naira. Some analysts have suggested that the BTA/PTA sale would need to be reviewed. The Guardian learnt that the monetary authority, indeed, had contemplated new policies to contain demand but backed down to political pressure.

As Nigeria bets against its currency
NAIRA held firm against convertible currencies in the 1970s, trading at 62 kobo to a dollar in 1973 when Nigeria converted to naira and kobo. But since then, it has lost over 99 per cent of its value against the greenback; the most preferred global reserve currency. That has put it in the basket of one of the worst performing currencies in living memory.

The historic fall was laced with manipulations, round tripping and other rent-seeking behaviours to which both the rich and the poor have subjected the currency. The behaviours, which Fasua described as an indication of low patriotism, had reached the level of desperation in the past few years.

As the desperate behaviours intensify, the lines between the elite and ordinary folks, as well as the vanishing middle class and struggling youths, are fast disappearing with the majority boxed in the same ring, while they watch the currency lose its peg against its peers.

Through different approaches, which reflect individuals’ economic power and exposure, Nigerians from all walks of life are piling pressure on the naira, shorting it in expectation of a further fall in value.

There is currently a worrisome tendency to short the currency (sell to buy it back when it slumps further) each time the dollar retreats slightly against the naira.

Experts, who have watched the behaviour, said the recent relief in the currency crisis when naira firmed up to around N640/$ was not sustained because thousands of desperate Nigerians cashed in to mop the available dollar for speculative purposes.

At the top of the economic ladder, the number of Nigerians fixing their money in foreign currencies abroad (an ancient practice though) has increased multiple folds in the past few months.

An investment banker, who is conversant with the trend, said “most politicians, businessmen, religious and traditional leaders have joined the race of taking both earned and stolen money abroad” in search of a safe haven.

“Inquiries about foreign accounts opening process has spiked in the past three years. Since then, it has continued to rise,” the banker, who said he has monitored the trend for 15 years, disclosed.

While Europe, the United States and the United Arab Emirates had been the traditional destinations of Nigerians seeking haven abroad, sources said interest has widened to a lot of African countries.

The interest in dollar-denominated accounts has widened from middle-class to artisans and low-income earners as well as students. Independent sources pointed out that interest in regular naira savings accounts, especially from young people, is being subdued by increasing requests for dollar accounts.

In previous interviews, Fasua had lamented that the behaviour represents extreme desperation by people who are determined to debauch their currencies. He warned that the naira could only dip to as low as Nigerians wish it, arguing that the most dangerous factors fueling naira depreciation are speculation and poor perception management. He noted that the country faced a huge problem as long as anybody could take a position against the naira for profit purposes, arguing that no measures taken by regulators under such a possibility would yield results.

Godwin Owoh, who was quoted earlier, had also made a case for aggressive clean-up of the financial system through a currency census, which he said, could also be achieved by changing existing denominations. He noted that a lot of unearned billions of naira are kept away from the formal financial system to hedge on FX – a major reason for the perpetual static disequilibrium in both financial and goods markets.

There are funds suspected to be proceeds of corruption kept away from prying eyes. Some of the foreign currency components of such money are suspected to be kickbacks sourced from the black market for settlement purposes.

Underground transactions, including intra-party politics, are highly dollarised. Politicians and first-class suspects ‘transact’ in dollar sourced from the black market. The electoral process is also dollarised. The recent political party presidential nominations were executed in foreign currencies with some delegates allegedly going home with as much as $50,000 each.

The Guardian could not independently confirm the claims, but the FX market did buckle during the exercises with real users completely shut out of the market. For the first time, the dollar crossed the N700/$ ceiling as politicians and their aides mopped up both Lagos and Abuja markets, creating historical scarcity.

Transacting in dollar is still illegal in Nigeria. But that is only a matter of policy. In reality, everybody jumps at offers in dollars. The law has not stopped some elite schools from taking tuition in dollars or pounds. It has not stopped some uptown landlords from insisting on rent payments in dollar. As Nigeria goes the dollar way, the question is no longer whether naira will retain the quality of money as a store of value, but whether it will survive the unfolding plunder.