On Foreign Exchange

May 19

What is Foreign Exchange (FX)?

Whenever people say FX, they usually refer to a foreign currency like the dollar or the pound. But that's not really what FX means, but when we explain in later paragraphs, you'll see why people do this.

In the literal sense, Foreign Exchange refers to international trade between countries. The Foreign Exchange Market is a global market for exchanging national currencies. It is in this FX market that you trade one currency for another. Why do you need to trade currencies? Well, because the naira is of no use to anyone but Nigerians in Nigeria. Probably of no use to us either, but that's for another day. Anyway, when you purchase a good or service from a seller in another country, you need to pay the seller in a currency that is of value to the seller. Typically, this currency is the US dollar because the dollar holds value for almost everyone. Maybe not the Russians at this time, but you get our drift.

What do you need FX for?

We mentioned this earlier, but you need foreign currency to settle international transactions because nobody wants your dirty naira.

Why does the Nigerian Government care so much about it?

First, Nigeria doesn't "print" dollars, so we can only get it when someone pays us for "something" in dollars. The "something" is usually crude oil, but it can also be other things that we sell to other countries. It's also essential because stealing dollars is way more valuable than stealing naira. That aside, the Government needs dollars to pay for international loans because our lenders won't accept repayment in naira.

Because foreign currency is an essential part of our survival as a country, the CBN, through the Central Bank of Nigeria Act, 2007, Section 24, is mandated to maintain cash balances and securities in financial institutions outside Nigeria.

When the country gets paid in dollars, this money goes to our reserves.

So if we want more dollars, we need to sell more stuff and to sell more stuff, the country has to be productive.

Borrowing is another way we get dollars, but nobody will lend you money if they don't believe you can repay. At the end of the day, it boils down to how much stuff we can sell. Lenders only give you money because they believe you need that money to stimulate productivity.

How do you get FX (Foreign Exchange) in Nigeria?

The Government is not the only entity that needs to pay for stuff internationally. Civilians need to as well.

As a civilian, you can either get dollars by informally exchanging with someone who needs naira (P2P or Black Market) or go to your Government to let you hold something.

Informal exchanges won't get you large volumes, so if you're a Dangote, that's probably off the table.

Now, the Government will only give you dollars if you have a valid reason for it. Remember that the Government has its own obligations, so they can't just be giving out dollars because you like the way it looks.

You can get $ if:

You need to pay for a service (intangibles)
You need to pay for a good (tangibles)
You need to spend money when you travel (travel allowance)

You're obviously not going directly to the Government to get this buck, so you go through your Bank, and your Bank puts in your request with the CBN.

This all sounds straightforward, and for a long time, it was until oil prices tanked and the economy fell apart in 2016/2017. Resulting in the Government not having enough $ to give everyone. They introduced a list of things that they'll never give you $ for to solve this. See the appendix for the list.

If your item was on the list, we'll you're OYO and need to go with one of the informal channels. The economy didn't get any better, so even if you had a valid item for $, you had to bid for the $.

Different FX windows for Bidding:

Nigeria operates multiple exchange rate windows, exporters, investors and end-users trade on the I&E(NAFEX) window, importers on the SMEIS window, while retailers on BDC(Bureau de Change) window
Things STILL haven’t gotten any better, so in 2022, the Government started forcing people to return the leftover $ from the travel allowance

Because we, the civilians, are not dumb and can see the jig, our demand for $ as an inflation hedge went up, and that's how we ended up in the shit show we have now.

How to apply for FX?

What you need FX for determines how you go about requesting it. The different options are mentioned below.

FORM M

If you need FX to import physical goods into the country you will need a Form M which is processed through your Bank. Form M states the general information of what you’re importing, including the country it was produced in, the country it’s coming from, how much it is, how you are paying for it, the quantity, weight, the exporter, etc. Other things to note include:

Form M is accessed online through the FGN single window for the trade portal.
You fill out the form and submit it.
The Nigeria customs approves or rejects your application within one working day.
Upon approval, your Bank either opens a line of credit for you and bids for FX from CBN on your behalf if the items are valid for FX, or they bid for FX on the agreed date if you agreed on future payment with your exporter via a payment option called Bills For Collection.

You still need Form M even if the items are not valid for FX; it is required for clearing the "Goods" at the port.

PTA/BTA/FORM A

To pay for service transactions(invisible trade) such as Personal/Business Travel Allowance (PTA/BTA), medicals, education, and other international remittances, you need Form A.

Form A is an electronic form that can be accessed on the CBN Trade Monitoring System (tradesystem.gov.ng.)

For individuals, a valid Bank Verification Number (BVN) and valid email linked to the BVN is required to access the system, while organisations need their Tax Identification Number (TIN)

PTA/BTA can take 1-3 business days, while school fees, medicals and upkeep take 1-3 weeks for processing.

What is the impact on the rest of the "ecosystem"?

These $ shortages aren't isolated in their impact. The cost of imported goods increased because it became harder to access $.
The banks also can't access $ to settle their international obligations, so they all reduced their FX spend limits.
This has led to startups springing up that offer FX solutions. What these startups are doing is essentially making the informal channels more user friendly.

Why is Foreign Exchange (FX) so important in Nigeria?

Foreign exchange involves trade, payments, and capital flow in and out of the country, and it is the instrument for generating revenue as a country. In these transactions, FX and not naira are what is used, and as we said before, FX can be dollars, euros, pounds e.t.c.

The availability/demand for FX for transactions such as importation of goods and services, payment of fees, etc. depends on the economy's supply in the form of exports of goods and services, monetary gifts, investments, and loans. The implication of this demand and supply of FX is that "for Nigeria whose currency is not convertible or serve as an international currency, she must necessarily earn foreign exchange through high productivity and export of goods and services, receipt of monetary gifts or receipt of foreign loans and investments to import needed goods and services aimed at the development of the economy and enhancing the welfare of the citizens".

FX is also a significant component of the country's external reserves, i.e. The Goverment’s foreign-held assets. In light of this, the Central Bank of Nigeria Act, 2007, Section 24, mandates the Bank to maintain external reserve assets in gold coins or bullion, balances in banks outside Nigeria, foreign short-term treasury bills and medium-term securities, Special Drawing Rights (SDR) of the IMF, etc.

The summary is that the backbone of the naira exchange rate is dependent on high foreign exchange earnings and external reserves. Simply put, if there is not enough FX in circulation(supply) in the economy to meet the demand for FX in settling transactions the exchange rate will go up.

For Nigeria, our economy in terms of production and export diversification has been pretty low. This is because we don't produce enough for ourselves, which means the demand for fx for importation is high. We also don't earn enough from exports because we don't produce enough. Our major export is oil, so the fluctuation in oil price affects earnings and we also spend a lot importing petrol.

Problem no dey finish.

Don’t ask us how to solve the problem. Nosa has some ideas but it’s not from us you’ll be hearing them. Until next time!

APPENDIX

Additional Information on obtaining FX

Form A

It is an application form designed by CBN to pay for service transactions(invisible trade) such as Personal/Basic Travel Allowance (PTA/BTA), medicals, education, and other remittances.

A valid Bank Verification Number (BVN) is required to access the Trade Monitoring System for e-Form A applications for individuals and TIN for organisations. PTA/BTA can take up to 1-3 business days while school fees, medicals and upkeep 1-3weeks for processing.

Form M

The guidelines say, "Any person intending to import physical goods into Nigeria shall in the first instance process the E-Form M through any Authorized Dealer Bank irrespective of the value and whether or not payment is involved."

To access the form M the importer logs in to the FGN Single Window on the Trade portal, fills out the form, and submits it. The Nigeria customs approve or reject the application within one working day, upon approval, the applicant's dealer bank opens a line of credit for the applicant and bids with the CBN to obtain the FX needed for the trade(if the item is valid for Fx). If it is not valid for FX, the importer source out for the fund themselves

Requirements for opening an E-Form M

Certificate of incorporation/ registration of the company in Nigeria
Registration with FIRS
Up-to-date tax payment and hence a Tax Identification Number (TIN)
Authorised Dealer Bank to process the E-Form M and initiate clearance of the Pre-Arrival Assessment Report (PAAR)