We have a problem…
….said the central banker to the stern looking men with guns. “No matter what I do, this foolish Naira will not behave. I peg the currency, it goes up. I float the currency, it goes up faster. I re-introduce a peg and continue pretending to retain the free float and the damn Naira defies me still. In fact, upon all my effort things just get worse at every turn….”
“Leave it with us” said the uniformed gunmen across the table. “This shit right here is what we do best”. Satisfied, with his new muscle the good banker rushed off to sort out the details of his latest scheme to ban (dollar earning) grain exports with the Presidency.
This is how I imagine the meeting between the geniuses collecting government salary at the EFCC, DSS and CBN went. Sha one way or another, it was decided that Nigeria’s latest forex policy should be to round-up BDC operators who sell forex above whatever price the CBN would prefer. Not being an economist, I shall respect myself and refrain from making any attempt to explain why trying to control the price of a commodity in a free(?) market is self-evidently futile and likely to be counter-productive.
Analysing the support that has been shown for the actions of these government agents is more my speed anyway. One report told of a ‘financial market analyst’ who applauded the raids as being a positive development “necessary to ensure compliance”. Another person wondered on twitter exactly what was so wrong with lawbreakers being arrested. Reading these comments and tweets I began to wonder what exact law these BDC operators have been supposedly breaking. So I looked it up and now I’m going to write some words on it. But first a general note on the Forex Act.
Nigeria’s forex regime is broadly governed by three federal acts. The main one is the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act (Forex Act) which establishes the forex market and prescribes the rules of the game. The CBN ACT and Banks and Other Financial Institutions Act (BOFIA) which regulate the conduct of the main players are also relevant but we don’t need to worry too much about them. The other major sources of forex law are circulars, directives and regulations issued by the CBN. These documents basically act as the meaty filling for the pastry (framework) established by the Forex Act created by the Forex Act. The Forex Act is still very important. For example, it tells us that the rate at which each transaction in the market takes place is supposed to be determined by the parties. It also tells us that everything short of “general unrestrained dealing” and direct breaches of its provisions are permitted. Basically, the gist of it is that that any transaction that is adequately supported by appropriate documentation and is not prohibited by law may be an eligible transaction for the purchase of foreign exchange in the market. The only real caveat is that all transactions should be conducted through Authorised Dealers which basically means anybody licensed by the CBN. I see no reason why this should not include licensed BDCs. Really, the point is that the legislation envisages a pretty permissive regime where participants are free to determine the price of their transactions by themselves, in other words, it would be a market. Happy days.
Enter the CBN.
Like all banks and financial institutions, licensed BDCs are subject to the regulatory purview of the CBN. Their Operations are governed by the Revised Guidelines for the Operations of Bureaux de Change, available here. As with most Nigerian regulations, there is some pretty cooky stuff in there for anybody interested enough to look through. For example, BDCs are not allowed to change their location, organisational structure, directors or management staff without the prior approval of the CBN. They are also not allowed to have branches, at all, anywhere, ever. In other words as far as the CBN is concerned, aboki business should always be the first (and only the first) M in MSME.
Ambling my way back to the central point, this regulation does make round-tripping of forex obtained from the CBN a “non-permissible activity” for BDCs. Street trading, maintaining foreign accounts and “capital market activities” are also prohibited. Failure to abide by any of these rules can result in revocation of a BDCs license or other sanctions which are prescribed in the regulation. In short, what I have found out is that the answer to the question “what law are these guys breaking?” is “maybe that one… depends on where they got their forex from, the spreads they offer and whether they have done anything the regulation says they shouldn’t”.
This is kind of a boring answer but I think it is important, at this point, to say that the fact there is a CBN regulation that these guys may have breached does not immediately make the recent conduct of the DSS towards forex traders any less reprehensible. Breaches of the regulations are not crimes and cannot lead to prosecutions. The only thing that may happen to them is a fine and loss of license. The CBN should be able to handle that itself and there isn’t much to justify the use of such overwhelming force to enforce fines worth no more than NGN2,000,000.00. That would be like the CAC bringing Nigerian Police to your office because you didn’t file annual returns.
We are not far from becoming a bona fide Police State.