Central Bank of Nigeria Governor, Mr. Godwin Ifeanyi Emefiele believes that the exchange rate volatility observed in the parallel market is being fuelled by speculation, currency substitution and also as a result of illicit wealth circulating in the country. In this interview with select journalists, he spoke on efforts by the central bank to ensure that foreign exchange regulations are effectively enforced, achieve price stability, as well as the central bank’s intervention initiatives to stimulate economic growth.
The Nigerian economy has been in turmoil leading to a decline in forex reserves and pressure on the naira resulting from the drop in oil prices. This has seen the central bank issuing one too many circulars on foreign exchange management in the last couple of months and there has been a lot of criticism about this. Some have even said the best thing for the CBN to do is to devalue the naira. What has prevented you from taking the decision to devalue the naira?
When you talk about turmoil in the Nigerian economy as a result of the drop in commodity prices, I would say what is happening in the world today is not peculiar to Nigeria. Like you know, the drop in commodity prices is not just about the drop in crude prices. It is about also the drop in commodity prices. We have seen a drop in the price of not just crude oil, we have also seen a drop in the price of tin, steel, as well as other commodity prices. As a result of that, naturally, countries that are affected have had to go through some challenges and some external shocks.
In a situation whereby in the entire world, there has been slow growth in practically all economies in the world, to the extent that today, there are only two economies where we can say they are going through what we can call fragile growth and that is in the United States and United Kingdom. All other economies – China, Japan, South Africa, etc – are experiencing slowing growth. And in spite of that, we are doing everything we can do to stabilise the economy as much as possible.
Now, when you talk about devaluation and depreciation as the case may be, following the drop in crude prices, we saw for instance as at June last year, the price of crude was $114 per barrel. At that time, our reserves were at $37 billion. By March, when crude prices had dropped to about $48 per barrel, our reserves had dropped to about $30 billion. That was over a 20 per cent drop. But at the same time, what we have seen is that we have also adjusted our currency from N155/$1 to N197/$1. That is almost a 22 per cent depreciation of the currency.
Now, when you are talking about depreciating a currency, there are three aspects in determining the price. You have the demand side and the supply side, and it is the interplay between demand and supply that determines what price the exchange rate is derived.
If we had adjusted the currency by almost 22 per cent and we have also looked at our supply, and it is not looking like inflows would continue to increase (reserves), we have to take measures to preserve the reserves. The luck we have is that we are blocking leakages as a result of the commitment of Mr. President, which is why we are seeing some accretion into the reserves. So, naturally, if you had done a currency adjustment by 22 per cent and you have looked at the supply side, I think it is also proper that you also look at the demand side. That was the reason we decided to begin to look at some of those things that we import into the country that are actually consuming our reserves. Of course, number one among them is the importation of petroleum products, which is very huge. And as a result of the commitment of Mr. President, the Warri and Port Harcourt refineries have started production. We are expecting that in August, Kaduna refinery would also start production.
If this happens, these three or four refineries could produce close to 20 million litres of petrol per day. With our daily consumption of about 30 million to 35 million litres per day, what you will see is that there will be a drastic reduction in the importation of petroleum products. Aside from petroleum products, if we look at the importation of rice, wheat, palm oil, sugar, fish and textiles, you will find out that a combination of these and other items, among the 41 items that had been excluded from foreign exchange market – including petroleum products, contributing not less than 35 per cent of foreign exchange demand – we will be able to achieve a drastic reduction in our imports, which will bring the demand for foreign exchange down. As that happens, naturally what you would find is that demand comes to a level where supply can match it and then the exchange rate can be seen to be stable. That is all we are saying and that is all we are doing.
But are you not concerned that the restriction of the 41 items from the official forex market has resulted in a wide gap between the interbank and parallel market exchange rate, and is inflationary?
See, the exclusion of these items from accessing foreign exchange at the interbank is not the cause of the wide gap between the interbank and the parallel markets.
What has resulted in the increase in the parallel market rates is as result of currency substitution.
We have a situation where Nigerians or people who are doing business in Nigeria deliberately convert their naira into dollars and they keep it as cash either in their homes or in banks or a clear incidence of speculation. The other factor that is responsible for that is also because we have illicit wealth circulating within the country. These are people who want to hide what they had stolen – monies that they had acquired illicitly – and they are converting it from naira into dollars.
But moreover, I have said that when you are trying to determine the real value of the naira, it is wrong for you to use parallel market rate as a benchmark for determining the real value of the naira because that market constitutes just about five per cent of the foreign exchange market. It is a shallow market to the extent that if you look at what happened between Thursday, Friday and even today (Saturday) in the parallel market – as a result of certain actions that were taken by the banks by saying they will not receive foreign currency in their vaults any longer – you will see that parallel market rates have dropped from a high of N244/$1 to almost N215/$1.
There are insinuations that the CBN is under pressure to reverse or review the ban on the 41 items from accessing the official foreign exchange market. How true is that?
Let me tell this, there will naturally continue to be feelings or the suspicion that we would review the situation. But as far as we are concerned, there is nothing to review because those items were well thought out. Before we decided to place them on the exclusion list, we thought about them and we felt these are items that can be produced in this country and that as long as we continue to import them, it would be difficult for our people to look inwards. We excluded them from the foreign exchange market so as to compel our people to look inwards. So for people to say it is something that we are going to review, I can assure you we are not going to touch it again.
Are you going to increase the list of items?
The truth is that as long as we find that there are more items that can be produced locally, I can assure you that we would increase the list. We are not saying that those 41 items cannot be imported, but we are saying that we don’t have the foreign exchange for you at the banks or at the interbank market for these. If you have foreign exchange from other sources, you must show us your proof of funds and where those funds are coming from. If you do not show us your proof of funds and you want to open a non-valid Form M, we would reject it.
We have noticed that the central bank, not just under your leadership, but with your predecessors as well, has continued to have the challenge of liquidity management and effective monetary policy transmission. Almost on a weekly basis the central bank sells treasury bills to manage excess liquidity in the system and yet it seems as if the desired impact is not being felt in the system. What is responsible for that?
Well, the challenge about liquidity management, in my view, will sort of continue because the transmission mechanism of liquidity moving from the CBN to the economy will continue to be there. We would continue to move monies in and out of the economy. The responsibility of the central bank is to monitor liquidity in the system to the extent that it is at the optimal level – above or below. If it is below, then we will pump liquidity into the system to achieve the optimum level. If it is above the level, what we will do is to sell bills so as to suck up that excess liquidity out of the system. So for me it is the normal responsibility of the CBN to be involved in liquidity management so as to achieve its objective of price and exchange rate stability.
The CBN did set an inflation target band of between 6 and 9 per cent. But with inflation currently at 9.2 per cent in June, which is slightly above the upper limit, is the central bank considering reviewing the upper limit?
You are very correct that the CBN fixed a target of between 6 and 9 per cent and inflation has moved to 9.2 per cent. It moved to 9.2 per cent because of increases in prices. For instance, we have seen petroleum prices moving up, and of course, when petroleum prices move up, what you have is that the cost of transportation goes up. As the cost of transportation goes up, naturally it would transmit into inflation. But we are hoping that as the food harvest improves in the course of the year, prices would come down and that would moderate inflation.
But is the CBN considering a review? The point is that we would continue to look at it. But as long as we are able to achieve single-digit inflation rate, even though it is above the target that has been set, we would be happy. And we are going to work very hard to see how to maintain a single-digit rate. But even if it is higher than the single-digit rate, it is going to be at a very low double-digit rate of about 10 per cent by the close of the year.
Back to foreign exchange management by the CBN, the recent decision by banks not to accept dollar deposits seems to be causing a rumpus in the market. Was the directive given by the central bank that commercial banks should reject dollar deposits?
The decision by the banks to stop collecting foreign currencies into their vaults was not taken by the CBN, but we whole-heartedly support that decision. First of all, Nigeria is the only country where you find that people go to banks and deposit foreign currencies in banks other than the local currency of that country. What we need to do is to remain nationalistic and accept only our currency as our legal tender.
You cannot go to the United States where the dollar is spent and try to pay pound sterling into an account, because you will be arrested. Neither can you go into the United States and carry Euros into that economy and tell them to pay it into an account for you; you will be arrested. The same way you cannot go to the United Kingdom where pound sterling is their unit of currency and then you carry dollars or Chinese Renminbi and try to pay into an account, because you will not be arrested.
So when you look at why the banks took the decision, the banks decided to take that line of action because they felt that the level of foreign currency that had in their vaults was above the optimum level that they could manage. Let me put it to you this way: when a bank accepts naira cash and it has excess cash in its vault, what it does is to take it to the CBN and the CBN gives them value for it. But when a bank has excess dollar cash in its vault, what is it going to do with it? If they take it to the CBN, what is the central bank going to do with it? So what you will find is that if they continue to accept it from bank customers, it becomes a useless piece of paper in their vaults because it is a non-earning asset. So that is why you are not going to blame banks that say they have excess foreign currency in their vaults and do not need it again because they don’t have a mechanism through which they can dispose of it and get real value.
Don’t forget, when you deposit your dollars into your domiciliary account in a bank and you go abroad and spend money using your electronic cards, that bank uses its own wired electronic money sitting in its correspondent bank abroad to meet your obligation, whereas your dollar cash is sitting in its vault. So that bank has to have a way of transferring that money from its vault into an electronic format to clear the obligation created abroad. As a result of currency substitution and the high incidence of people trying to hide their illicit wealth, the level of foreign currency in our system has ballooned such that the banks can’t cope with it again. That is why we are where we are today.
But didn’t the banks approach the CBN to help them transfer the foreign currency abroad, why did you reject that request?
It was because what we found out was that the amount was unduly high and we had a reason to believe or suspect that there were some money laundering activities involved and that the
central bank will not be party to money laundering activities that are being perpetrated by people who got their wealth illegally or people who are involved in currency substitution.
But how did this foreign currency accumulate so much in the banking system. Are banks not supposed to report all cash deposits in excess of $10,000 to the authorities?
Your guess is as good as mine. I don’t know how it ballooned to that extent. But the point is that because we have an open economy, there is a tendency that people would have been carrying cash in and out of the country and we are in a situation where we have seen more of the cash coming in than going out. In any case, we do not allow people to carry foreign currencies exceeding a certain amount in and out of the borders any longer. The security agencies are monitoring this aggressively and I suspect that is why it appears that there is a glut of it within the system.
Approximately, how much of this foreign currency do we have in the banking system?
I don’t have the exact amount, but I believe it is over $1 billion cash.
By rejecting foreign cash deposits, is the CBN not tampering with people’s ability to operate domiciliary accounts?
No there is no attempt to tamper with people’s ability to operate domiciliary accounts. But what we are saying is that we would support the banks when they say they would not accept dollar deposits in domiciliary accounts.
So for those that need to transfer monies for school fees, medical bills and other legitimate transactions, how do they do that?
Our foreign exchange regulations provide how people can carry out their legitimate businesses, including payments of school fees, mortgages and other bills. All you need do is to go to your bank, fill the Form A and support it with the relevant invoices and the dollar
will be wired to wherever you want it wired for your legitimate transactions. Don’t forget, before now, we always had BTAs and PTAs and what we did was to complement it with the activities of the BDCs. We made it more flexible, so we have BDCs carrying out retail transactions for those who are travelling and want to pay medical bills. What we are saying is that these transactions must be done within the ambit of the law. The problem we have is not people who want to carry out legitimate transactions, either for payment of school fees and others, but we have certain people who are involved in currency substitution. There are certain people who got their wealth illegally and are thinking of the best ways to launder these funds. That is the main issue.
But there are some people who also consider the dollar as a better store of value?
Every country has its own legal tender. In Nigeria, our legal tender is the naira. In the US, the legal tender is dollar, the UK has the pound sterling. So the citizens of that country are obligated to store their value in the legal tender of those countries. Let me put it this way, can you imagine if you choose to store your money in dollars and 170 million other people also choose to store their money in dollars, do you know what would happen to our legal tender? Do you know what would happen to the reserves of the country? So that is why it is not advisable for anybody to contemplate that the best way they want to store their money is in a currency that is not the legal tender of that country.
You also pointed out that there is no country in the world where citizens are not allowed to open other accounts apart from their domestic currencies and you cited the US, UK, among others. But some African economies do allow this?
I doubt if there are other economies that allow that and I am going to investigate that. But I am telling you that citizens of other countries are not allowed to operate domiciliary accounts. Nigeria is so free that people are able to do anything that they want to do. Go to South Africa or Ghana, their foreign exchange controls are far more stringent than what we have in Nigeria. I am telling you that it is not obtainable elsewhere.
So what happens to multinationals that bring in foreign currencies to sell in the market as autonomous sources?
It depends on the source. The multinationals must be bringing in those currencies for a purpose. Either it is capital importation, in which case they are bringing it in to invest in the country. So there are regulations guiding capital importation and what you do with it. For instance, the oil companies are exporters and the law allows you to open domiciliary accounts. You open a domiciliary account and what it allows you do is to receive the proceeds of your exports. When you receive the proceeds of your export, you are obligated to convert it to local currency. The latitude we have allowed was that after you have received your export proceeds and you want to make use of it to import eligible transactions, you are allowed to do so. But if you do not have any reason to import anything with the dollars you brought in from export proceeds from eligible transactions, you are obligated to convert it into the local currency by selling it in the interbank foreign exchange market.
You appear not to be comfortable with the country’s regulations concerning money laundering. What effort has the CBN made to amend the law on money laundering?
The truth is that I am not comfortable with it because the Foreign Exchange Miscellaneous and Malpractices Act of 1995 allows you, for instance, to export large volumes of cash just by taking it to the airport and declaring it. But we have stopped that and we are beginning to say, when you want to take it out, you must tell us where you got it from. You must tell the Customs where you got it from, what tax you paid, the business you transacted, and in fact, a further explanation on why you prefer to carry cash out of the country instead of passing it through a legal channel or wired transfer. There must be some illicit business you are involved in that is encouraging you to want to take dollars out through cash. Otherwise why not go through the legal means to do so. So those are some of the things we are going to be addressing in the courseof time. While we do that, we would go to the National Assembly to amend the law.
There is this concern that the CBN is going outside its remit by now intervening in fiscal issues. Why is the CBN doing that?
The CBN is not going outside its remit to take on transactions or businesses that it cannot do. The CBN has a mandate for price and monetary stability, the CBN has mandate to build reserves and maintain a stable exchange rate. Aside from that, the CBN Act allows the central bank to carry out what people call the development function that it is carrying out now. Section 31 of the CBN Act allows it to carry out that responsibility. But the point is this, if you are talking about price and monetary stability, what you are talking about is you are trying to keep your inflation low, you are trying to keep price within an acceptable level and what you are saying is you want to see how you can achieve macroeconomic stability.
For you to achieve macroeconomic stability, you are talking about how you have made life meaningful for your people. Making life meaningful for your people also means the efforts you have taken as a monetary authority to contribute positively in the lives of Nigerian people by creating jobs or taking decisions on job-creating opportunities and in that process you achieve economic growth and development. That is what we are doing. We have not done anything that is outside our remit. We have the CBN Act that guides everything that we do.