Funding Smuggling And Money Laundering From BDCs

Source: huhuonline.com

'In the wake of the recent Central Bank's pseudo liberalization of dollar supply to the foreign exchange market, naira rate tumbled from over N140=$1 to today's rate of about N130=$1 in the black market, leaving a spread of just about N2 from the official rate.   Ordinarily, this should confirm the success of ongoing economic reforms to eliminate multiple exchange rates and the attendant distortions in our national economy; but there may be some lessons to be learnt from a closer evaluation of how this apparent 'magic' has come about, given that black market rate had never in the history of the naira suffered such a fall in so short a time.                                                

 
  'In essence, CBN achieved this feat by bombarding the unofficial market with dollars from our surfeit dollar reserves!   There have been undenied speculations that the Abacha regime managed to keep black market and official rates at near parity by a constant flow of dollars into the black market from the junta's liberal access to our dollars in the 'unsafe' custody of CBN at that time.   We recall the $700m or so allegedly kept by Abacha's son in a 'private extension' of CBN!   The current economic team may have borrowed a leaf from Abacha's precedent, but have successfully navigated Abacha's illegality by publicly formalizing and legitimizing an open channel for funding the black market!   To this end, CBN has been supplying over 200 Bureau De Change (BDCs) $400,000 each, weekly, from the nation's official dollar reserve.   I do not know how many BDCs are registered, but suffice it to say that if there are only 100 BDCs, this would imply a direct funding of $40m a week.   On the other hand, if there are 1000 BDCs, then this would be a funding of over $400m a week (or $1.6bn a month).   Mark you, this amount does not include the usual stock of dollars sold directly to the commercial banks for onward sale to bona fide importers, industrialists or recognized international service providers (such as airlines) through CBN's wholesale dollar auctions.    

 
  'The banks have now also been authorized to offer BDC services directly to their customers; it is not clear if each bank would receive only a weekly allocation of $400,000 for a single BDC licence or more likely an allocation of $400,000 for each branch where BDC services exist.   If the latter is the case, then the earlier monthly projection of $1.6bn allocation to BDCs will most certainly be exceeded!   Let us remind ourselves that BDCs worldwide serve an informal or itinerant market.  

 
  'It may be pertinent at this stage to ask to which purposes the $1.6bn monthly BDCs dollars are expected to be applied.   Top of the list must be for travel expenses; other uses may be for overseas educational and medical expenses (even though under the current dispensation, bona fide students and patients with authentic documentation can still access their foreign exchange requirements from CBN's twice weekly auctions to banks).   You may wonder that health and education cannot genuinely gulp up $1.6bn every month; so where will the bulk of this dollar value go?   The answer most likely, would be for the importation of smuggled goods, which cannot be accommodated under the government's import guidelines.   BDC allocations would also be a ready pool to facilitate capital flight and money laundering by politicians and corrupt civil servants!  

 
  'If as is likely, the bulk of BDC dollar allocations are diverted for importation of banned goods or for siphoning away naira loot, then, the administration would have undermined stability and promoted distortion in our nation's economy by its own making!   The endangered species of small and medium industrialists may finally be swamped by smuggled, more competitive consumer goods funded with cheaper BDC dollars.   The greater profit motivation in smuggling will test the integrity of our 'officially' impoverished civil service, particularly the customs services to the utmost and rob the nation of substantial import duty revenue.   The unemployment level will rise as more factories close down, consumer demand will fall and the economy will further totter; but surprise, surprise, the banks will continue to declare huge profits that can only be a dream for those industries in the real sector whose heavy interest burdens continue to depress already battered margins.  

 
  'For the above reasons, some analysts hold that our monetary authorities have misplaced their priorities.   Some say that their approach to reducing the gap between the parallel market and official rate is akin to smashing a cockroach on a glass table with a sledge hammer!   It can be argued that the problem is not supply of dollars to the market but the huge pool of naira in the money market every time the monthly conversion of the nation's dollar revenue to naira is paid into bank accounts of the three tiers of government.    

 
  'The amount of distributable naira can be expected to continue increasing as we begin to draw down our huge dollar reserves of over $30bn for domestic application in the critical areas of health, education, employment, etc;   inadvertently, the increasing amount of naira provides an increasing larger pool for the acquisition of dollars from BDCs.   In other words, the more the naira shared every month, the greater the demand for dollars in the BDCs and the greater the distortions caused by smuggling and capital flight and the greater the downward pressure on naira value.  

 
  'It is interesting that the significant drop in black market rate of the naira has not been reflected on the official rate which serves the needs of the real and formal sectors, whose prosperity impact positively on other sectors of the economy.   In view of the reality that our naira officially exchanged for N80=$1 with a paltry reserve base of less than $5bn in the Abacha years, we would expect under normal circumstances, that our embarrassingly huge dollar reserves should have given rise to a much stronger official naira exchange rate, such as N60=$1, so that the cost of imported vital industrial raw materials and machinery would have fallen by almost 50% with salutary effects on our economy; but inexplicably, naira rate has defied basic economic principles by remaining resistant in the face of our increasing export dollar earnings.  

 
  'We are fortunate to have 'excess' dollar reserves to support dollar profligacy to BDCs for now, but what happens when dollar income from crude oil is depleted?   Presumably, we may need to borrow from our international friends, who have just fleeced $13bn from our tattered pockets to continue funding our BDCs!'   The above article was first published on 17/7/2006 under the title 'CHEAPER BLACK MARKET DOLLAR'.   It is reproduced in response to media report (Vanguard 8/9/2008-pg A3) that as from 4/9/08, 'CBN increased foreign exchange sales to BDCs by 50%..., so that each BDC can now buy up to $600,000 per week or $2.4m every month!   With about 800 BDCs in Nigeria, this would amount to $1.9bn sales every month' !    Who will save our country from the doubtful wisdom of the CBN?   In view of the lucrative BDC trade in foreign exchange, it is likely that BDC population may have since increased to over 1000!   In this event, Central Bank monthly dollar allocations to BDCs probably exceeded $3bn.   Indeed, in the Soludo years, such direct dollar sales to BDCs was in excess of $4bn in some months, even when official dollar sales to bona fide importers and foreign exchange users in the real sector was below $2bn!   The bulk of BDC forex inevitably went to treasury looters who wished to ferry their booty abroad and other smugglers of contraband goods, which importation seriously undermined local industry with the attendant loss of government revenue and increasing unemployment!   In addition to the officially approved personal forex allowances of $20,000 for school fees, holidays, medical bills, etc, directly available from banks, every Nigerian is also allowed unlimited remittances annually from BDC dollar purchases.   But pray, how many Nigerians earn over N3m ($20,000) a year?   Furthermore, is it realistic to expect any one   from the 1 - 2% of Nigerians who may earn such handsome wages to commit the whole sum to the purchase of forex without recognizing domestic needs for rent, school fees, transportation, nutrition and health expenses and still have surplus naira to also patronize BDC offerings?!   It does not require the knowledge of rocket science to deduce that CBN's laissez fair allocations to BDCs is a deliberate strategy to fund the dollar requirements of smugglers and looters of the public treasury, while pretending to defend the value of the naira!   For example, in December 2009 a Bank PHB Manager was apprehended at the airport with about $3m which she claimed was sourced from BDCs rather than from official auctions.   This is a clear testimony that the CBN continues to deceive Nigerians by extolling the virtues of its stranglehold and unholy monopoly of the foreign exchange market and its suicidal dollar sales to BDCs.   Incidentally, the Manager, Mrs. Emem Etuk is alledged to also be the Accounts Officer for Akwa Ibom State accounts with Bank PHB!   Later in October 2010, a Nigerian family was also apprehended at a London airport with various denominations of foreign exchange valued at over £500,000.   On Wednesday, 3 rd November, the CBN in a statement by Mr. Muhammad Abdulahi, Head CBN Corporate Affairs confirmed that 'it had been inundated with complaints from foreign countries that some Nigerian travellers indulge in cross-border transportation of large sums of foreign currencies in cash, and that Nigerian Customs Services returns show that large amounts up to $3m cash have been taken out of the country by individuals in single trips (Business Punch, 4/11/2010, pg. 15).   Consequently, as from 8 th of November 2010, the CBN would withdraw the licences of Class 'A' BDC operators (i.e. those previously authorised to buy up to $1m from the CBN ever week.'   This may sound as the acceptance of common sense by the apex bank at last; regrettably, however, the apex bank has left an open window for smugglers and continued capital flight by its accommodation of weekly sales of $100,000 each to Class 'B' BDCs.   The whole benefit of CBN's ' awakening' will be lost if membership of Class 'B' BDCs inevitably increases tenfold!!   The truth is that CBN has no business whatsoever funding BDCs!!   If the CBN , however, succeeds in holding its nerve on this issue,   and stops dollar sales to all BDCs , we will once again witness a widening gap between official and black market exchange rates!   This would provide the CBN with a ready excuse to narrow the gap and devalue the naira in spite of what this portends for inflation, increased cost, more factory closures, and increasing unemployment!!   Save the Naira, Save Nigerians!    

By: Les   Leba