Last week, the Central Bank of Nigeria (CBN) once again underscored the limits of administrative intervention in support of prices in any market. In a circular to authorised dealers (presumably in the foreign exchange market) and the public, the apex bank “reviewed downward” “the existing limit on the usage of the naira denominated cards for transactions overseas”. Effective April 13, 2015 (the date of issue of the circular), the limit on this transaction was “reduced from $150,000 to $50,000 per person per annum”. Additional restrictions pegged “daily cash withdrawal limit embedded in the cards per person, per day” to $300.
There was no question but that the CBN was acting to conserve its dwindling stock of foreign exchange. But the problem is that it had used this tool before to questionable effect. Worse is that as a signalling lever, this yo-yo moments do nothing but send conflicting signals to the markets.
In this instance, I strongly believe that the conflict lies in the nature of the problem the central bank was trying to solve. Conversations with friends in the banking industry on this matter yielded as much clarity as the blacked-out windows increasingly favoured by these associates of mine on their cars.
On one account, it would seem that before the CBN’s latest directive, Nigerians had taken to travelling abroad to withdraw dollars off their naira-denominated cards; and returning to the country only to sell these onto the black market. Apparently, according to this narrative, “abroad” was anywhere, including Ghana it seems, where one could use a dollar-dispensing cash machine.
With the arbitrage window between the official and parallel markets reaching as close as N20 on the dollar a couple of weeks back, this transaction was always going to return handsome rewards to players in the market. Besides, on this account, charges on such cash transactions, anything between N1,000 and N2,000, were not sufficiently punitive enough to discourage this behaviour.
If you include in appraising this, the fact that all such withdrawals are direct debits on the CBN’s external reserves, then the rapid deterioration of the reserves, even as the apex bank took strenuous steps elsewhere to stem the haemorrhage through its retail Dutch auction window, made sense. Did the recourse to fiat qualify as an appropriate response? I was not too sure. At the very least, I thought the CBN could have been more descriptive in the aims of its policy intervention.
That was before I spoke with a different set of Nigerians. Most users of the naira-denominated cards outside these shores, dismissed the “round-tripping” narrative as poppycock. Both the Nigerian bank issuer of the cards, and the foreign bank providing the cash dispensing services charged on all cash transactions, I was told. So the charges on this are a lot more punitive than was initially made out.
In addition, this other category of market participants swore that the exchange rate at which the banks converted the dollar dispensed at the cash machines into naira charges on their clients’ accounts was a lot higher than the apex bank’s official rate.
Thus, not just were the charges a lot higher for such transactions, but with banks’ converting at higher exchange rates, the arbitrage opportunities were not attractive enough to support the industrial scale “round-tripping” that would have invited the CBN’s attention.
Except of course that the banks were the ones creaming the transactions. So, according to this view, bank source dollars at official rates and then sell these on to their customers for a significant mark-up. These transaction dynamics, sadly, do not add up. Not being end users in this transaction, the banks are in no position to generate the traffic required to earn them the mouth-watering returns, which alone can explain this line of business.
At a point, I was not surprised that the conversation around this initiative looped in on itself. Anyone who has tried to manage a shortage without freeing the market for the good in question would find that the resulting queue literally ends up looping in on itself.
I do have doubts about the quality of the CBN’s queue management competencies. But I am dead certain that no matter how good its queue management systems are, they can only detract from its other competencies. And in this case, the arguments around the theory of comparative advantage suggest that the CBN is better left alone to focus on its “price stability” remit, while the market bears the burden of allocating scarce resources between competing domestic needs.