Expect N1000/$ With CBN Ban On Forex To BDCs – Chukwu

Mr. Johnson Chukwu is the Managing Director of Cowry Assets Management Limited. In this exclusive interview with MMS Plus newspaper, he bares his mind on several pertinent economic issues in the country, analyzing the impact of the Central Bank of Nigeria’s (CBN) ban on sale of forex to Bureau De Change (BDC) and speaks on Petroleum Industry Governance Bill, among other germane fiscal issues. Excerpts:

My take is that the initial reaction we are going to see the naira depreciate further and I think that the depreciation will be very steep. CBN has to find avenues or channels to meet the demand of legitimate customers who were patronizing the BDCs. The value BDCs had was simplicity and efficiency but CBN’s move to sell through the banks may not have the same level of efficiency. This means that traders and legitimate fund users will be hard pressed to get dollar from the banks. As it stands today, CBN is already struggling to meet the forex demands from the commercial banks. Banks have also been struggling to get the forex to meet their customers’ demands. This move by CBN would put more pressure on the banks and because supply is shorter than the demand, closing the channels of forex distribution would lead to a situation where the prices will move up at a very fast rate. Consequently, that could lead to depreciation of the naira.

I doubt if CBN could meet the demands of those who need forex speedily for legitimate reasons. Under the Cabotage trade, ship chattering, Nigerian Ports Authority (NPA) charges, Nigerian Maritime Administration and Safety Agency (NIMASA) charges are paid in dollars. This means that for people involved in shipping, CBN has to create a window for them to quickly access funding within or apart from the window already available from the banks. If that fails and vessels arrive Nigeria, because they are time-bound, these business persons will be forced to buy the dollar at any rate.

For instance, to take a product of 15,000 mt from Lagos to Calabar will be about $26,000 per day amounting to $260,000 for a period of ten days. It will be difficult to walk into a bank and demand $260,000 to quickly pay shipping charges. The banks will ask such customer to open Form A and bid for it. The bank wouldn’t be able to certify that bid is less than six months. The vessel would hold your product for that period and your demurrage charges will be $26,000 daily for the delay. Under such circumstances, any business person would be willing to buy dollar at any rate, even if it is N1000 per dollar.

So, these are forex transactions that are legitimate and time-bound. Another alternative may be that the federal government legislates that all Cabotage charges be made in naira. However, this could force foreign vessel owners to withdraw their ships because their crew, liabilities and maintenance cost are in dollars. It may lead to a situation where there are no vessels to carry out the coastal trade in Nigeria. The indigenous ship owners don’t have enough vessels to meet the nation’s demand and these operators will also be affected because the cost of maintaining their vessels is in dollars. CBN has to consider that these transactions are live, time-bound and have easy access to forex through the BDCs. These forex needs are almost instantaneous and eliminating the BDCs means that CBN has to start opening windows for such transactions.

We are talking about forex needs that emerge on daily basis. So, one-off intervention doesn’t solve the problem.

Using a colloquial example, if someone didn’t have breakfast and lunch, the fact that a meal that is the size of two portions is served at night doesn’t mean the person wouldn’t be hungry again the following morning. So, the demand for forex is a continuous one and interventions ought to be consistent. CBN has to find a way to meet these legitimate demands.

I was discussing with a friend whose child is going to study overseas and they needed to buy BTA. Since his daughter is going for a five-year programme, she doesn’t have a return ticket and the banks wouldn’t sell BTA because she doesn’t have a return ticket. He had to resort to the BDCs to get forex. There are such legitimate demands as when people have to pay school fees and can’t wait for the process via the CBN, they have to approach the parallel market. There are traders who import products in small quantities at the rate of $30,000 to $50,000. They buy dollar in bits from the BDCs in the region of $10,000 and pay into their domiciliary accounts to transfer money to their suppliers. Such traders will either be pushed out of their business or they’ll buy dollar at any rate.

CBN has to address these legitimate forex demands in order to make this policy work without incurring negative unintended costs or negative implications for the nation’s economy. If the scarcity is sustained, the commercial banks will begin to introduce shortcuts. As long as there is a high demand for something, you can’t fix a price because people will go for it any cost. It’s not like the banking halls are operated by saints. My opinion is that CBN finds a way to reform the BDC system to make them more efficient and have other independent people who have the structures to run such business.

I was a banker when the official rate was N22/$ and the unofficial rate was over N70/$. Banks would collect N22/$ from the CBN and sell to customers under the table for something closer to parallel market rate. We need to avoid that kind of scenario coming back to the banking system.

Until Nigeria improves the supply of forex, everything we do is half measures. We need to have a forex system that is sustainable. The problem is with the supply of forex and we can’t legislate the demand. The issue is that the nation hasn’t addressed the supply of forex. Until we address this issue, every other thing will be efforts to address unmet demands or backlogs of forex demands.

The commercial banks will put in better control mechanisms. They will ask for required certifications and those who don’t have such documents wouldn’t have access to the forex. While that is the upside of the new arrangement, we also have to deal with the fact that some of those forex demands that wouldn’t get the required documents will end up in the parallel market to buy dollar at any cost available. The parallel market will eventually be the real rate of the naira exchange.

When we analyse the increase in VAT and customs duty,  there are two things we need to look at. We have to note that the base effect that we have to differentiate. We shouldn’t be comparing the quarters in 2021 to last year. Last year was an abnormal year because of the COVID-19 pandemic. By the end of the first quarter last year, the economy of Nigeria was shutdown because imports weren’t coming in and no one was shipping.

The cargo volumes in 2021 will represent a significant increase when compared to the figures last year. We should be comparing the VAT and Customs duty to what would have been collected in a normal year because 2020 wasn’t a normal year.

People were asked to stay at home for most parts of the first half of last year as companies were shut, markets closed, no flights nor traveling. It was much later that the pharmaceutical shops and other essential services were opened. There was very low consumer demand for most products last year. So, an attempt to compare both periods will likely give a wrong impression that economic activities have increased. However, in reality things haven’t gone back to the way they were before the crisis.

World Bank made a projection that the Nigerian government may have no choice than to increase VAT in the next few years given the paucity of government revenue. They projected that the government could increase VAT to 15% from 7.5%. That’s 100% increase estimated to be attained by 2025 through a gradual yearly process.

What we did in our recent weekly report was to state what the World Bank has said and this has initiated a lot of discussion and questions on the issue. Can Nigerians afford higher consumption taxes given the fact that there earnings have already been quickened by inflation, foreign exchange valuation and depreciation of the naira?

The federal government hasn’t said they want to increase the VAT yet, so we can’t begin to debate it. This is just a recommendation from a multilateral agency and the federal government hasn’t commented on it. Nevertheless, we know that the federal government has said repeatedly that it has a very poor revenue and it is looking for ways to improve revenue generation.

It is a good thing that Nigeria has a governance framework because it would provide some clarity in the sector unlike what we had in past that was based on the 1960’s legislation. The PIB will be a new governance framework that will guide investors and encourage more investments in the sector.

Beyond the setbacks from the oil producing communities who feel that the 3% allocation is insufficient, I want to believe that the PIB when signed into law should provide some clarity and be of value to the oil sector and the nation’s economy.

The banks wouldn’t have any challenge from that. I don’t see them being unable to meet their liquidity because of the monies tied down in the Dangote refinery. Ultimately, if the investment  is very economically viable, when it starts operation it should be able to meet up the arrears. I believe the banks that went into it understood some of these constraints and didn’t break their balancesheets in the move to finance Dangote refinery. I don’t envisage any bank having liquidity challenge as a result of investment in Dangote refinery. If there is any challenge it would come from Dangote, but it should be resolved when the project takes off.

NNPC may be looking at an enterprise valuation while the other value could be the net value. The Enterprise value could be higher that the amount Dangote has invested in the project. However, I wasn’t involved in determining that, so anything I say will be purely speculative.

The first losers will be the BDCs who will be losing huge sums of money. Nevertheless, if the underlying issues aren’t addressed the nation’s economy will be the biggest loser. If we have an exchange rate that as I understand already moved by more than N10 following the CBN ban in a single day. If that depreciation continues and the demand pushes the rate to N600/$ or N700/$, Nigeria will be the ultimate loser because it would lead to inflation. More people will be impoverished and the hardship in the country would worsen. BDCs are the first losers but if the situation isn’t managed, the entire country would suffer.

Cabotage charges, shipping charges, vessel hiring charges are paid in dollars. NPA and NIMASA fees are paid in dollars and their clients access monies from the BDCs because their transaction throughput is so short that they can’t afford to delay going to open Form A to bid through their banks to the CBN. That process would take more than six months to get that allocation to charter a single vessel. If the vessel already carried your product, it would be held and attracts more financial costs via demmurage. This category of people would pay anything to get forex to prevent such situations.

The new challenge would also reflect in the pump price of petroleum products because the dealers would also have to factor in the additional costs in their depots prices.