Wow: The Central Bank of Nigeria (CBN) has an x-factor to the Naira challenges, and is “introducing a single singular foreign currency (FCY) gateway bank to centralize all correspondent banking activities…” in Nigeria . According to Investopedia, a “correspondent bank is a financial institution that acts as an intermediary between domestic and international banks. Correspondent banks provide third-party services on behalf of another financial institution, usually in another country.”
Banks like Citi and UBS serve as correspondent banks to many Nigerian banks; it seems Nigeria wants to take them up. In a post last week, I noted the pressure Naira was getting via cross-border lending. It is indeed very refreshing that the apex bank is looking at how to close some loopholes outside the nation.
If Nigeria goes ahead with this FCY gateway bank, many good things will happen, but it will also open the nation to new risk vectors, on contract obligations. Yes, if Citi serves say Zenith Bank, Zenith Bank arguably expects the funds to be there since they’re far apart. But if a unit of CBN is taking care of that, how would the commercial bank’s global customers view that arrangement in the international market? More so, how would Zenith Bank relate with its regulator in this context?
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Yet, if this works, Nigeria can have clarity on the movement of funds in its ecosystems. Possibly, a better view of some activities like money laundering and round tripping of funds will emerge.
Domiciliary Accounts in Nigeria
Domiciliary accounts are not our problem. It has always been here. Think of it: what is $30b in dorm savings to affect Naira if Nigeria is productive? South Africa Stock market is worth $960 billion, Nigeria NGX $50billion. Our national budget is $30b, South Africa’s $137 billion. Because we’re all-money no-capital, we see positives as negative. Those $30b could become asset classes in NGX and deliver capital in Nigeria. In the USA, people package debts & loans and create exotic assets which are worth $billions in the capital market. But Nigerians have cash and some are complaining that dorm accounts are bad. I do not think so.
Poor people use money, great nations build capital on money. Nigeria has $30b (US dollars) in its banking sector which can be turned into capital and advance the nation. If you close dorm accounts, families will still ask for dollars for foreign medicals, schools, etc because we’re destroying local options. So, we need to allow dorm accounts to breathe.
The Strength of Naira Comes from Factories and Warehouses (not CBN headquarters)
The strength of Naira does not come from CBN headquarters, but from warehouses and factories (old and modern). Banning dorm accounts will be a mistake: we cannot focus on symptoms instead of fixing the root causes. If politicians are round tripping funds, arrest and prosecute them, instead of banning dorm accounts. If bad guys are entering Nigeria, arrest them over closing land borders. If people are diverting petrol to Cotonou, arrest them via a better Customs system instead of removing fuel subsidies since every decent economy subsidizes energy for competitiveness.
Yes, if you ban dorm accounts, politicians will still steal and will find new avenues to do their things. Hello, real estate. Dorm accounts are a global thing, from Canada to Kenya, UK to Australia, and beyond; Nigeria did not invent it. In those countries, their currencies have not crashed. In China, HSBC China will help you open bank accounts in China in nine major currencies , from USD to Yen.
Daily, we wake up with directives and circulars to banks, from CBN. In the past, during the military and before 2011, CBN used to publish working papers. I am hoping to read more working papers so that we can see data which they’re using to make these decisions.
In this piece, I also argue that Nigeria’s FX problem is not connected with dorm accounts. Most countries operate dorm accounts, from Canada to China, and their currencies have not crashed. Instead of seeing the $30B in dorm accounts as a negative, Nigeria should flip it as a positive.
In America, people buy debts, repackage them into exotic assets and sell them for $billions. The Nigerian capital market which has access to $30B in USD in our banking system can come up with something more exciting. Lack of innovation is the reason we see positives as weaknesses. Our stock market is worth $50B when South Africa is worth more than $960B because they innovate; someone there would turn that $30B from money to capital, and by the time all is done, you have a new asset-sector worth $100B.
Banning Domiciliary Accounts Will Destroy Nigeria’s Economy!
In this piece, I have made my case that dorm accounts are not the cause of Nigeria’s FX paralysis. Most countries have dorm accounts. In HSBC China, you can get nine foreign currencies if you want. Many Canadian banks can offer you US bank accounts in Canada. Within Africa, many countries offer dorm account services via their banks. If we have illegal activities on dorm accounts, prosecute them; do not ban the service. We cannot be using the blanket model. You cannot fix corruption in fuel subsidies, you remove them even though subsidies on energy are not bad. You struggle with contrabands, you close land borders; not great.
But if Nigeria decides to ban dorm accounts [Nigeria will not do that], it must realize that it is equivalent to closing Zenith Bank, one of our nation’s largest banks, on an asset basis. Yes, people will use peer-to-peer services and move those $30 billion funds outside the nation. Do you prefer the funds in Lagos or scattered in New York, London, etc?
Nigerians must not pressure the central bank to wake up daily fighting Naira just from its headquarters. The strength of Naira does not come from CBN headquarters, but from warehouses and factories, the modern and the old. We should allow CBN to also breathe, and get the team to leave their offices and visit Aba, Kano, Ibadan, Jos, etc and explore how to help those companies. Daily circulars and directives will not solve this problem, only more shifts in factories will do.
I think a lot of “finance” reforms and changes have been made; now is the time to explore the other side: improve manufacturing environments and ease of doing business. Let us help CBN to make that case. Personally, I commend the team for their efforts last week; but I want them to diversify the solution space.
—from Mr. Olayemi Cardoso, the Governor of the Central Bank of Nigeria (CBN) speech
“In the short term, we have put in significant work, and we are witnessing results in improving the market structures and removing all the bottlenecks stifling the supply of FX into the country.”
“We have addressed the challenges to remittance flows, reduced the ability of banks to hold on to positions, and more importantly, we now have the export proceeds from the national energy sector flowing back through the Central Bank. We have also initiated several short-term measures to make naira assets attractive to foreign investors”
“The eventual stability of the Naira will be driven by our ability to address the fundamental issues affecting our economy…bring inflation under control and promote the growth of Nigerian businesses such that we eventually export much more than we consume as a nation.”
Short-to-Medium Term Strategy Focus on Improving FX Inflows and Stabilising the Naira
1. Our policy focus is on achieving rate stability and maintaining market flexibility and liquidity. The move to unify the naira exchange rate and lift currency trading restrictions in June 2023 aims to establish market-driven rates through price discovery. This strategy seeks to create a more efficient and transparent FX market to boost investor confidence and reduce market volatility.
2. Over the past six months, the Bank has taken deliberate steps to enhance liquidity and FX supply in the forex market. All FX transaction windows have been consolidated into the NAFEM platform. Outstanding FX obligations, particularly those of foreign airlines, have been progressively settled. Enhanced monitoring of FX market activities and a continued emphasis on transparency and price discovery are key priorities. These efforts will be further consolidated in the future.
3. Recently, the CBN removed the exchange rate cap to enable International Money Transfer Operators (IMTOs) to disburse remittances at market-determined rates without restrictions, following a willing seller, willing buyer approach. Additionally, the transfer of the NNPC account to the CBN, as directed by Mr. President, aims to increase liquidity in the market. These measures address the FX market’s liquidity challenges, streamline capital flows, and mitigate currency risks.
4. In line with coordinated monetary and fiscal policies, efforts are underway to ensure that all USD-earning agencies and parastatals remit their earnings directly to the CBN to enhance transparency and liquidity in the FX market.
Medium-to-Long Term Strategy Focus on Improving FX Inflows and Stabilising the Naira
1. The CBN is currently devising strategies to revamp the Bureau de Change (BDC) segment for enhanced efficiency and aims to streamline their numbers for better management and supervision.
2. Exploring mechanisms to incentivise individuals holding foreign currency (FCY) outside the banking system to deposit these funds within the banking system, necessitating the establishment of a legal framework.
3. Plans are underway to establish an Investor Relations Group (IRG) modeled after the Philippines to elevate Nigeria’s credit profile and position the country as a prime investment destination.
4. Introducing a single FCY gateway bank to centralize all correspondent banking activities, currently dominated by two major banks in the corresponding banking space.
5. Strengthening surveillance and technological capabilities to monitor cryptocurrency transactions effectively.
Wow: The Central Bank of Nigeria (CBN) has an x-factor to the Naira challenges, and is “introducing a single singular foreign currency (FCY) gateway bank to centralize all correspondent banking activities…” in Nigeria . According to Investopedia, a “correspondent bank is a… pic.twitter.com/dEEwQqTl5c
— Ndubuisi Ekekwe (@ndekekwe) February 6, 2024
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How about having engineers with finance and economics knowledge run the CBN and other key sectors of the economy? There is a way engineering forces you to think, you have to be nuanced, able to simulate and model probable outcomes, before taking any critical action.
Sometimes our choices are severely limited simply because of how we think about things, one dimensional thinking does a lot of damage. There are critical questions that if we are able to ask them during policy formulation, our chances of success will greatly improve.
Not long ago a naira redesign policy was implemented here, with the idea of limiting withdrawals to N20k daily. Nobody sat down to model what this would entail if people were to withdraw their N20k daily for one week, what quantity of naira notes must be made available? Rather we printed some notes, and then hoped that those who withdraw first would deposit back for others to withdraw later, and everything collapsed before our very eyes…
Finance guys run things in developed economies, because it’s largely about manipulations and speculations, but if you try same in a developing economy, you will quickly run out of luck. We are still focusing on the wrong people for rescue, we need to focus on makers.