Naira depreciation war: Wrong weapon, bad tactics

The Central Bank of Nigeria (CBN) is desperate and seemingly frustrated by the ineptitude of its monetary policy instruments as weapons against intractable depreciation of the naira. The apex bank has apparently been compelled to take on targets that had all along been ignored probably because of the mega criminals involved.

In August 2020, the CBN took its monetary policy instrument campaign against the depreciation of the naira to the fortress of Nigeria’s Form-M billionaires. It directed that Form-M, a vital document for settlement of import bills, be routed directly to ultimate suppliers of goods and services and not through agents.

It provided dealers with products price verification mechanism (PPVM) that would guide them in determining the authenticity of prices quoted by importers in their Form-M.

Economy watchers contend that 90 per cent of Nigeria’s billionaires made their money through manipulation of Form-M and dubious over-invoicing which give them access to two or three times the amount of forex needed for settlement of a particular import bill.

Ironically, over-invoicing thrives on the multiple exchange rates operated by the CBN. At the best of times Nigeria operates a minimum of three exchange rates. There is always an attractive margin between the official and parallel market rates. That is primarily what encourages over-invoicing and other Form-M frauds.

The importer buys forex at an official rate which at the moment is about N100 less than the parallel market rate. Since forex is almost always scarce, the importer at times bid for two or three times what is needed to settle his import bills. 

The excess is sold in the parallel market at an attractive margin. Currently, an importer who is able to obtain an additional $1 million from inflated import bill, sells the excess in the parallel market at a mouth-watering gain of N100 million. That is what fuels Form-M fraud.

The CBN is doing that battle with its hands tied to the back. Its ineptitude in the campaign against naira depreciation with such monetary policy instruments emanates from the fact that the parallel market presents a flourishing market for the proceeds of Form-M fraud.

Two weeks ago the apex bank added yet another monetary policy instrument to its arsenal in the war to stabilise the tottering naira. This time operators of domiciliary accounts were the targets of the new instrument.

CBN banned customer-to-customer transfer of forex by domiciliary account operators. CBN officials contend that the new monetary policy instrument weapon emanated from established fact that domiciliary accounts have become useful tools for money laundering.

Treasury looters now raid the parallel market with naira proceeds of their loots, buy available dollars at ridiculously low naira exchange rates and dump the dollar proceeds in their domiciliary accounts.

The stolen money converted into dollars is eventually transferred abroad for investment in property markets. Again the CBN is fighting a war with its hands tied to the back.

The stolen money is taken to the parallel, not official window of the foreign exchange market for conversion to dollars.

That conversion would be practically impossible if the apex bank did not provide a booming market through the parallel market window. Unlike the official market where mandatory formalities plague transactions, the parallel market is an informal market where very little documentation is required. That explains why it has become an annex for laundering stolen funds.

With a thriving informal market, the domiciliary accounts restriction would be difficult to enforce. If looters cannot deposit the converted funds in their domiciliary accounts, they would dump them in septic tanks at home.

Success of the new restriction on domiciliary accounts depends solely on banks willingness to report lodgments in individual accounts. Judging from poor compliance with the law mandating reporting of daily lodgments above N5 million by individuals, it is obvious that the CBN would find it extremely difficult to monitor lodgments into domiciliary accounts.

Banks hardly report lodgments by treasury looters to law enforcement agencies in the financial system because they need the deposits even when they are proceeds of crime.

The CBN knows this fact but still believes that banks would abandon their collaboration with criminals and support its new policy.

That support could only happen if there are incentives more attractive than the deposits brought in by treasury looters. Ironically CBN has none at the moment.

Nigeria’s escalating economic crisis and persistent depreciation of the naira has defiantly worsened despite an array of monetary policy weapons deployed against it. What is needed is a new approach. That new strategy must come from the fiscal not monetary angle.

Depreciation of the naira is engendered by structural economic defects that could only be addressed through fiscal policies. Nigeria spends $1.2 billion annually on health tourism because local healthcare delivery system is in advance stage of decay.

It spends $2 billion annually on school fees for  its students abroad because no one trusts local universities to impart the knowledge that would arm students for the hot contest in a bloated labour market.

Murderous Fulani herdsmen have turned most of Nigeria’s farms into slaughter slabs.

The consequence is that less farming is being done and the yawning food deficit is filled by imported items which consumes $22 billion annually. Insecurity is intractable.

The journey from Lagos, Nigeria’s commercial nerve centre, to Abuja, the political capital takes 12 eternal hours on terribly bad roads infested by robbers and kidnappers. A delivery truck sneaking through the terrorized roads wade through a minimum of 200 check points mounted by corrupt law enforcement agencies. Each driver parts with a minimum of N200 at each of the check points to quicken his passage. An effective rail system delivers the goods at 10 per cent of the cost on roads.

These structural deficiencies account for the high demand for forex amidst dwindling supplies.

What is needed is a fiscal approach that would address the infrastructure deficit that engender demand for foreign goods and services and consequently forex to fulfill the demand.

If the education system meets world standards, even the rich would train their children at home and conserve forex. 

If the healthcare delivery system rises above the consultancy clinics that the kleptomaniac Sanni Abacha alluded to in 1993, the rich would patronize it and save the $1.2 billion spent annually in medical tourism.

If mechanized farming replaces subsistent peasant farming, Nigeria would save the $22 billion spent annually on food imports.While there is need to stem Form-M fraud and laundering of looted funds through domiciliary accounts, the CBN demand-side approach to Nigeria’s critical forex supply deficit with monetary policy instruments would remain embarrassingly futile until the federal government wakes from its fiscal slumber. 

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