Business

CBN has started to take control

Published

10 months ago

February 27, 2024

Shehu Bashir Esq

THE CBN’s ARROW ON CARRY-TRADE. By: Victor Ogiemwonyi Last week, the CBN issued a circular in respect of FX collateral for Naira Loans, to the effect that it has now expressly forbidden the use of FX as collateral for Naira Loans. Banks that already are exposed, have been directed to wind down their positions in 90days. This circular, again confirms that, there is a lot of solid thinking going on at the CBN. Carry-Trade , is what is referred to, when you bring FX to trade in another jurisdiction by taking a loan in the local market and collateralizing it with FX deposit. It purely signifies that the investment is short term and only aimed at making a profit. The CBN has used high interest rates to attract investors to its instruments, but want to make it clear, that they will not allow unrestrained speculation. The policy is Excellent in its timing to be sure, to the extent that It will mitigate the speculative capital that can affect an economy quickly. We have seen the destructive impact of currency speculation evidently in Asian Financial crisis in 1997, when speculators took on the Thailand’s currency, the Bhat and the Malaysia currency, the Ringgit with economic consequences so severe, that it prompted Mr Mahathir Mohammad , the then prime minister of Malaysia to call Billionaire George Soros a moron. He explains …..” we spent years developing our economy, that has helped many rise, to the middle class, and a moron like Soros, comes around and ruins everything" Soros responded by describing Mr. Mohammad as “a hindrance to his country” …Soros and other Currency Speculators, say they are a “force for good “ in a market economy, given that their activities ensure bad economic policies, propping up weak currencies are not allowed to stand. They argue that their speculation makes economies competitive. Regardless of the economic logic for and against speculation, countries like Nigeria should be prepared. They have learnt from the Asian crisis and will ensure Speculators are aware, that Nigeria is watching their activities. The recent notice from the CBN points to this. The 90 days given to Nigerian Banks, to wind -down the loans, is also an appropriate time frame to wind down these loans. Most of the loans are already short term in nature, any way. The Carry-Trade, is also a structured speculative trade. It is one, of the ways to speculate in currencies and other market assets, legally. It starts with pairing two interest rates and taking position in currencies and other market assets. If this practice is not checked early, it can become a contagious problem that can create bubble capital rapidly, from Speculative bets. This is commonly referred to as “ Hot Money”.That is the capital that leaves without notice. We cannot , afford such speculative trading now. Let us settle the money already in the system, while we carry on with other reforms quickly, to increase our attractiveness as a destination for investment. The foregoing not withstanding, we must also point out that speculative Capital is not all bad. It is like taking a short term loan, to tidy up your position. Foreign portfolio investments of this type, provides the immediate liquidity that is needed to fund the FX market, that gets the economy going, while we work to restart properly. We must quicken our reform efforts, to make our economy attractive to attract more Foreign Capital. We already have an attractive large market with our huge population. Further investment in Health and Education, with attention to our energy infrastructure and security , will greatly advantage, our population . We will also need to give our youths the technical skills, to make them more employable. Only strong growth, will ensure full employment. We will need double digit growth in the next decade to ensure this, and make our economy attractive. This is why the current high interest rates, need to come down quickly, once the CBN achieves its objective , of mopping up the excess liquidity in the system, and restoring fair stability for the Naira. The Africa Continental Free Trade Agreement (ACFTA) is a gift to Nigeria, if we know what to do with it. We have a potential to substantially increase our exports and reduce our imports, as we manufacture more of what we need. We must sincerely push our Agriculture to produce more, for our own consumption ,and for exports . We have all the God given comparative advantages, good soil, huge population and a deep market, that provides the incentives. As we become more productive overall, the Naira will get stronger. We have just passed a milestone that many are yet to take notice of: we have allowed the Naira to find its value, even in a down economy. The Naira found support at N1900. That means, in the short run, that is the worse we can expect the Naira to dip. The CBN is also now, preemptively and intelligently signaling price, through the funding of the Bureau De Change market, which is essentially the Black Market. We expect Companies who genuinely need FX, to now be able plan for it. Victor Ogiemwonyi is a retired Investment Banker, and writes from ikoyi, Lagos

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CBN HAS STARTED TO TAKE CONTROL.

By: Shehu Bashir Esq

I am happy to observe that the Central Bank of Nigeria, CBN, has started to take control and do the needful to rein in the criminals and saboteurs and forex speculators. I am particularly happy to note that some of the “radical” suggestions I made in my previous notes are now being strategically implemented and even improved upon. The new policy of the CBN which is attached hereunder is the right step in the right direction. All we need now is continuous enforcement without any iota of compromise.

However you look at it, it is not correct that we allow a few manipulators and speculators take charge of our legitimate forex market. Demolishing all illegal stalls (online and offline ) used for illegal forex market is good, moving forward. I can attest that the Zone 4 is now given a clean shave, just like NCC has been directed to block all illegal websites being used for forex speculation. Therefore, we can continue other strategic policies implementation including high tech control of forex manipulation that is usually done through crypto and others. Gradually, we will get there

The next radical step I expect the CBN take is to call the bluff of the World Bank and International Monetary Fund against their manipulative advice to float our naira without considering the peculiarity of our markets and marketers. Nigeria economy has everything for us to survive without taking any exploitative capitalistic advice from the IMF and WB. It’s all about natural resources which we have in abundance, we only have to harness them and earn more FX. When we control the physical FX liquid in circulation and stop all criminal round tripping, we will see a sanitized system.

I will not shy away from the fact that Abacha called the bluff of these global capitalists, pegged naira-to-dollar exchange rate for years and Nigeria did not fall. On the contrary, we did better.

Malaysia and Saudi Arabia will never float their currencies to give any advantage to the dollar, why are we doing it to please the West. So, CBN should take further steps to stop the blackmail by IMF and WB, even America and UK are still officially controlling their FX. What are we talking about about?

Below are the key points from CBN’s reversed regulatory and supervisory guidelines for bureau de change operations in Nigeria as compiled by Mislaw.

1● Non-Eligible Promoters: Certain entities like banks, government agencies, NGOs etc are not allowed to have ownership stake in BDCs.

2● Permissible Activities: BDCs can buy and sell foreign currencies, issue prepaid cards, serve as cash points for money transfer operators etc. They cannot take deposits, grant loans, deal in gold or engage in capital market activities.

3● Sources of Foreign Currencies: BDCs can source forex from authorized dealers, travellers, hotels, embassies etc. Large transactions above $10,000 require declaration of source.

4●Sale of Foreign Currencies: BDCs can sell forex for travel, medical bills, school fees etc up to specified limits per customer annually. At least 75% of sale must be via transfer, 25% can be cash.

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5● Categories of BDCs: There are 2 tiers of BDCs – Tier 1 with national presence, branches and franchises; Tier 2 restricted to 1 state with max 3 locations.

6●Financial Requirements: Minimum capital of N2 billion for Tier 1 and N500 million for Tier 2. Other fees and deposits specified.

7● Licensing Process: Two stage process – Approval in Principle and Final Licence, each with specified document requirements.

8● Corporate Governance: Board composition, assessment of propriety, fitness requirements for directors and senior management specified.

9● Operations: Must verify customer identity, keep transaction records, connect to CBN systems, display rates clearly etc.

10●Supervision: Specified regulatory returns must be rendered, records available for inspection, compliance with guidelines required 11● Franchising Standards: Standards specified for Tier 1 BDCs appointing franchises regarding policy, monitoring, branding etc.

13● Prudential Requirements: Specified limits on open position, fixed assets, borrowings, dividend payment etc.

14● AML/CFT Requirements: Must comply with AML/CFT regulations on policies, monitoring, reporting etc.

15●Penalties: Non-compliance may lead to sanctions including revocation of licence.

NOTE: In summary, the guidelines aim to regulate all aspects of BDC operations from licensing, governance, sources of funds, forex transactions, reporting, supervision etc in line with Central Bank objectives.

ADDENDUM
What is now required is for CBN to strictly and stringently monitor commercial banks and their CEOs and should not hesitate to use the biggest hammer to penalize anyone who flouts these regulations. If we can maintain these and improve on them, enforcing without compromise, we will see a better market forces and an improved economy.

God bless the Federal Republic of Nigeria.