We refer to the Central Bank of Nigeria [CBN] circular of 24th August which directs that Form M for Letters of Credit, Bills for Collection and other forms of payment should only be opened in favour of the ultimate supplier of a product or service. While the Lagos Chamber of Commerce appreciates the efforts of the CBN in curbing abuses in the foreign exchange market, this policy measure would create more problems than it would solve. Already most foreign exchange transactions have been frozen on account of this circular. What this means is that the supply chain of over 80% of the business community has once again been disrupted and dislocated. This is like substituting the global supply chain problem with a domestic supply chain disruption.
It is impractical to expect all importers of raw materials, equipment, and other inputs to buy directly from the ultimate producer, manufacturer, or supplier, especially in an economy driven by SMEs.
Even in the domestic economy, distributors and dealers form the bridge that connects the major manufacturers to the retailers and consumers. Middlemen play a critical role in the supply and distribution chain in any economy, domestically and globally. They bring a great deal of value to the process.
We urge the CBN to please review this new policy on payments for imports to save the already ailing and distressed Nigerian economy from complete collapse. Many businesses are yet to recover from the devastating shocks of the Covid 19. Some have in fact collapsed, while others are struggling to regain momentum. This policy negates the current laudable efforts by the government [and even the CBN itself] to ensure business continuity, sustainability, and recovery. It is also in conflict with the letters and spirit of the Economic Sustainability Plan of the Federal Government.
The SMEs are the most vulnerable and would be the first set of casualties of this policy for the following reasons:
- They do not have the capacity to place huge orders that the main producers or manufacturers would require.
- Many of them currently enjoy suppliers’ credit from the agents from whom they buy, a privilege they would not get from the original product manufacturers. Some enjoy up to six months bills for collection on raw materials imports.
- The liquidity crisis in the foreign exchange market has worsened the perception and country risk of Nigeria in the international trade arena as many foreign payment obligations are not being met. Some domestic investors have in fact lost their foreign credit lines as a result. This naturally creates difficulty in doing business with the main manufacturers or suppliers.
What is playing out in the foreign exchange market and the associated infractions are symptoms of the policy shortcomings in the management of foreign exchange market. There is high degree of uncertainty which fuels speculation; there is a high component of forex demand driven by the arbitrage opportunities which differential rates offer; there is the component of demand driven by accumulation of inventories of raw materials caused by the current opacity in the market; there is the desperation of the non-resident portfolio investors to exit the Nigerian economy. Therefore, the policy response should be situated in the context of these underlying conditions.
The disposition of the CBN to suppress market forces in the foreign exchange arena is a major issue. Attempting to subdue the market in a free enterprise economy is like swimming against the tide. It is not sustainable. It creates distortions, transparency problems, corruption, and drives forex and international trade transactions underground, and into the informal space.
It also obstructs the inflow of foreign exchange, either from foreign investors or remittances. These are potential sources of foreign exchange inflows which could stabilize the forex market. Diaspora remittances for instance had consistently been around $20 billion annually over the past few years.
A market driven forex policy would also incentivize the repatriation of export proceeds. It is unfair and unjust to compel exporters to offer their proceeds at N380 to dollar when the open market is around N470 to the dollar. This disparity would naturally create compliance issues. It also contradicts the craving of government to promote export development. Exporters deserve an unfettered access to their export proceeds.
The proposal on price verification would amount to another layer of bureaucracy with the attendant problems that comes with such bottlenecks. Once the exchange rate management framework is right, it would be absolutely unnecessary to introduce another hurdle of price verification. Indeed, it would be a distraction to the CBN. The Nigerian Customs has a full-fledged department on valuation that is charged with the responsibility of determining the value of imports. It is a paradox that while the Nigerian Customs is busy hounding the private sector of under invoicing and underpricing; the Central Bank is accusing businesses of over invoicing and overpricing. This is yet another quandary for the business community. The LCCI hopes that the new policy on payment will be urgently reviewed to avoid further disruptions to businesses.
DR MUDA YUSUF
LAGOS CHAMBER OF COMMERCE AND INDUSTRY
30TH AUGUST 2020