Introduction

The Central Bank of Nigeria (CBN) has started 2017 on a bullish note by overseeing the valuation of the naira. While it has thus far attempted to keep its pledge to defend the naira and not carry out any further devaluation, there has been a quiet but effective devaluation.

In addition, the CBN has intervened in the foreign exchange (FX) market in an effort to narrow the significant gap between the official exchange rate and the parallel market rate. This seems to be working, but it remains to be seen how sustainable this will be in the long term.

CBN foreign exchange and banking policies

On February 20 2017 the CBN released three circulars in an effort to boost FX supply. It released a circular on personal travel allowance (PTA) and business travel allowance (BTA) for Nigerian citizens, allowing eligible persons to purchase $4,000 and $5,000 respectively per quarter. To purchase a PTA, the applicant must:

  • be a Nigerian citizen of 18 years or older;
  • be a Nigerian passport holder;
  • be an account holder of the chosen bank;
  • be travelling on a flight originating in Nigeria that is no less than five hours in duration;
  • purchase the PTA no more than 14 days before the respective date of travel;
  • have a verifiable bank verification number; and
  • have a duly funded account.

The maximum allocation is $4,000 per applicant, per quarter.

Initially, there was a requirement for tax clearance certificates, but this has since been dropped.

With regard to FX sales for school fees, the CBN mandated that applications will be for university education only. Remittances must be made directly to the university's account and there is a limit equivalent to $15,000 per semester. Applications can be completed by students or their parents or guardians and must comprise a completed Form A and an admission letter and invoice from the university.

The CBN, in line with the above aims and objectives, has begun providing FX to all commercial banks to meet their needs with regard to the onward sale of PTAs and BTAs to their customers. The CBN has carried out a number of forward sales for FX, while also reducing the tenor of its forward sales from a maximum cycle of 180 days to 60 days from the date of transaction.

The CBN has directed all banks to open FX retail outlets at all major airports to ease the burden of travellers. Commercial banks must open airport branches as soon as their respective logistics permit them to do so.

On March 30 2017 the CBN released the circular Increase in Forex Sale to Bureau de Changes (BDCs). The aim is for the apex bank to sustain liquidity in the FX market. Starting from April 3 2017, the CBN will commence bi-weekly sales to BDCs. The sale amount will be $10,000 (an increase from the existing $8,000). Thus, the bi-weekly sale will be $5,000 per bid. The CBN also stated that a new rate will be announced on April 3 2017.

Critique

Many economists and financial analysts have for some time criticised the CBN for the capital controls that it has put in place. Nigeria has been in a recession for the first time in 25 years. The recession is due to low oil prices and militant attacks on energy installations in the Niger Delta.

Approximately seven different exchange rates are effective in Nigeria, including:

  • the CBN rate;
  • the interbank rate;
  • the rate for pilgrims travelling abroad;
  • the Travelex rate (FX obtained at the airport); and
  • the BDC rate.

This creates a level of distortion, as investors are unlikely to invest at one rate and recoup their money at the same rate.

The International Monetary Fund (IMF) has advised the CBN to jettison the multiple foreign exchange rates and lift capital controls in order to attract investors to the country and revive the economy. The IMF has further stated that the naira is approximately 20% to 30% overvalued. In essence, the IMF has hinted at the CBN to carry out a further devaluation of the Nigerian currency.

2017 economic outlook

The Nigerian economy took a battering in 2016, which contracted by the second quarter. The recession led to a drastic decline in oil revenues, the impact of which was seen in the capital controls put in place by the CBN and the general uncertainty it created for investors. As Albert Einstein famously said, "in the middle of difficulty lies opportunity".

The 2017 budget, entitled 'Budget of recovery and growth', is worth N7.29 trillion, 20.1% more than the 2016 budget. Provided that the government can implement a good fiscal and monetary policy, the economy will likely rebound. The multiplicity of FX challenges needs to be addressed and the adequacy of FX supply dictated by market forces also needs to be looked into seriously. Conversely, FX illiquidity, FX market fragmentation and inflation are likely to harm economic activities and investor confidence.

Comment

After a tough economic year in 2016, the CBN and the federal government appear to have a good grasp of what they need to do to revive the economy. The challenge will be the implementation of key economic and fiscal policies to reposition Nigeria on the map and cement its place as a true giant of Africa and an emerging market player in the world.

A strong banking industry – in which banks have a healthy cash ratio, low interest rates on borrowings, competitive interest rates on savings, less capital controls, a sound FX system, greater transparency in the ease of doing business and the necessary political will of the government – will go a long way in steering the economic ship from recession to recovery.

For further information on this topic please contact Victor Olabode Munis at TRLPLAW by telephone (+234 1 4533 100) or email (victor.munis@trlplaw.com). The TRLPLAW website can be accessed at www.trlplaw.com.

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