Photograph — Irene Abdou

On Monday, the Central Bank of Nigeria (CBN) ordered banks to set aside 60 percent of their total foreign exchange purchases from all sources, including interbank, for manufacturers, while other users are to get 40 percent for the purpose of trade and other transactions. The decision was taken following a review on the disbursement of foreign exchange to end users. The apex bank said it observed that a negligible proportion of foreign exchange sales are being channelled towards the importation of raw materials for the manufacturing sector. The order, sent through a circular titled “Foreign exchange sales to end users,” also stated that the banks should continue to publish weekly sales of foreign exchange to end users in the national newspapers and to provide legal returns on same to the CBN promptly. But, despite these measures aimed at promoting transparency, there are reasons why the policy may backfire.

The CBN not only wishes to ensure that sufficient foreign exchange gets to the end users, but, importantly, that it gets to users who will create a sustainable impact on the country’s economic performance. Despite the good intentions of the CBN, the policy may be plagued with problems comparable to that of the government’s abandoned exchange rate peg. The abandoned exchange rate peg of 197 Naira to the US Dollar was similarly instituted to protect local manufactures but the policy led victims to incidents of round tripping and arbitrage. In some cases, funds meant for the purchase of raw materials were simply exchanged in the black market at a higher rate for profit, defeating the purpose of the subsidised rate.

Allocating 60 percent of Forex to the manufacturing sector may bring about instances where new manufacturing companies begin to claim money earmarked for manufacturing. The aim of the 60 percent allocation will be defeated in the event that pseudo or ghost companies arise to divert these allocations. It may not necessarily have to be the case that the companies are fictitious. It could be that redundant companies request allocations on behalf of the wealthy consumers of foreign exchange who do little to enrich the average Nigerian. The publishing of weekly sales foreign exchange to end users in the national newspapers will help the CBN to track the sectoral allocation but may not prevent the redirecting of Forex to manufacturing firms.

Deeper measures of transparency and the use of incentives may persuade banks to take undergo stronger checks to ensure that allocations reach the intended end users. The government’s policies in the past have been subject to loopholes that have undermined the administration’s objectives. Hence, it will do well to address potential shortcomings proactively.

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