Central Bank of Nigeria

The CBN’s effort over the last 12 months at managing the domestic monetary space has not done much to burnish its reputation. And now we are at that point where the markets’ “animal spirits” have overtaken any consideration of the economy’s fundamentals. How to square what looks like becoming a vicious cycle? Truth is, we must do all in our power as an economy, to restore confidence in the ability of the respective authorities to appreciate the challenges we face, and design solutions that work.

When, mid-2015, just about every Nigerian bank declared that “the large volume of foreign currencies in their vaults” allowed them to “stop accepting foreign currency cash deposits into customers’ domiciliary accounts”, you needn’t be a dibia to have worried. The numbers simply did not add up: falling oil prices; trouble moving oil cargoes; and the fiscal funk that the three tiers of government were (and still are) in, simply did not support this new-found dollar “affluence”. That the Central Bank of Nigeria (CBN) was to weigh in (on the banks’ side) on August 5, 2015, prohibiting DMBs (deposit money banks) from accepting “foreign currency cash deposits” only muddied the waters further.

Not too long after, the foreign currency space was replete with reports of banks unwilling (unable, they could not have been, given the large volumes of such deposits they were, on their own admittance holding) to meet the withdrawal needs of their domiciliary account holders. Interestingly, the only person who these reports did not reach, was the one person able to do something about it. Apprised of this development in his first media chat, President Buhari promised to reach the CBN Governor over the matter.

Did he? Or did he not? Not that any of that matters at this point. It is enough that last week, the CBN rescinded its prohibition.

Whereas the August prohibition made much of the apex bank’s “continued efforts to stop illicit financial flows in the Nigerian banking system, which aligns with the anti-money laundering stance of the federal government”, the January 11, 2016 circular with which the CBN lifted the restriction was agitated by “the continued effort to ensure the stability of the foreign exchange market”! We could split hairs here, ad nauseaum, and assume either that the five months between both circulars was more than enough for the CBN to address the money laundering vulnerabilities represented by the foreign currency flows into bank vaults, or that in a trade-off between illicit funds and foreign exchange market stability, “we” plump for the latter.

The fundamentals of our economy are such that the naira has ceased to be a store of value. Keep your wealth in naira-denominated assets and moths (low yields) and rust (inflation) will get to it before you do.

Any which way, this government’s policy response function looks, daily, unfit for purpose. And nothing illustrates this difficulty more than the unintended consequences of the CBN’s latest foray into the foreign exchange space. It would seem that no sooner than the domiciliary account deposit restrictions were lifted, than banks were inundated by enquiries from customers wanting to know whether they could carry out same day transfers of these deposits.

On reflection, this shouldn’t have come as a surprise. The fundamentals of our economy are such that the naira has ceased to be a store of value. Keep your wealth in naira-denominated assets and moths (low yields) and rust (inflation) will get to it before you do. It thus makes sense for resource-rich segments of the economy to seek more stable financial instruments to salt their wealth away in. With the US Federal Reserve System tightening monetary conditions, the dollar comes very highly recommended for this role.

The truth, though, is that our people long since made this transition away from the naira. Only two years ago, the balance on domiciliary accounts was 25 percent of total bank deposits in the country. With personal home remittances reaching about US$20bn in 2014, not even the size of the domiciliary account balances was out of the ordinary.

…as the banks’ customers have struggled to access foreign exchange domestically, the banks have found themselves supporting their trade books with their nostro accounts. Anecdotal evidence suggests that some of these accounts are already in the red.

What was shocking, was that a central bank facing a rapid draw down on its foreign reserve balances, should have plunged a dagger into the heart of this trend. So, it wasn’t just the fundamentals of the economy that drove banks’ customers’ need to transfer the balances on their domiciliary accounts. The central bank’s poor signalling also has been a problem.

This signalling challenge showed up in the banks’ response to their customers’ transfer requests. Now, for every domiciliary account transfer request a bank concludes, several things happen. It obtains dollars. With these, it could readily meet those requests that the president’s attention was adverted to in the media chat. But it most probably would be paying interest on some of these dollar deposits, at a time when a shrinking economy imposes objective limits to its ability to deploy such funds. Meanwhile, the offshore end of the transfer request is completed off banks’ foreign currency (nostro) accounts with their offshore counter-parties. Now, because the economy has screeched to a halt, those accounts have not seen much inflows into them of late. However, as the banks’ customers have struggled to access foreign exchange domestically, the banks have found themselves supporting their trade books with their nostro accounts. Anecdotal evidence suggests that some of these accounts are already in the red.

Indeed, most customers then referred their relationship managers to Argentina’s “corralito” in 2001, when Domingo Cavallo, the then Minister of Economy, banned withdrawals from accounts denominated in U.S. dollars, unless the owners were willing to convert the funds into pesos at the prevailing official exchange rate.

Could it then have surprised that banks were unwilling to transfer funds off their customers’ domiciliary accounts, in the light of the additional burden these represent to their nostro accounts? Could it also have come as a shock that customers were unwilling to deposit foreign currencies into these accounts, without clear exits from them? No. Indeed, most customers then referred their relationship managers to Argentina’s “corralito” in 2001, when Domingo Cavallo, the then Minister of Economy, banned withdrawals from accounts denominated in U.S. dollars, unless the owners were willing to convert the funds into pesos at the prevailing official exchange rate.

Conclusion? The CBN’s effort over the last 12 months at managing the domestic monetary space has not done much to burnish its reputation. And now we are at that point where the markets’ “animal spirits” have overtaken any consideration of the economy’s fundamentals. How to square what looks like becoming a vicious cycle? Truth is, we must do all in our power as an economy, to restore confidence in the ability of the respective authorities to appreciate the challenges we face, and design solutions that work.