Esezobor (2009) observed that the first attempt at regulating the foreign exchange system in Nigeria after independence was the passing of the Exchange Control Act in 1962. This Act vested in the Central Bank of Nigeria, the authority to approve all applications for visible imports and certain invisible items apart from repatriation of capital, profits and dividend which were hitherto the exclusive functions of the Federal Ministry of Finance.
3.1.1 Regulation to De-regulation
The period 1962 to 1986 was seen generally as the period of regulation to deregulation or more aptly, the pre-Second Tier Foreign Exchange Market era (Esezobor, 2009). The Nigerian currency at the time, pound, was tied to the British Pound Sterling in parity up to 1967 when the latter was devalued. The attempt to place the value of the Nigerian Pound on the gold content was short-lived as the currency got pegged against a basket of foreign currencies made up of Deutsche Mark, Swiss Francs, French Francs, Dutch Guilder, Japanese Yen and Canadian Dollar between 1971 and 1978. In line with global decimalization of currencies, the pound gave way to Naira and kobo in 1973. In 1984, the Buhari-led military government changed the colours of the naira and gave a short deadline for the exchange of the old notes to the new notes. This action was in response to the high volume of the naira floating outside the country at the time. Same year, the value of the currency was matched against the Pound Sterling and United States Dollar as intervention points. From 1985, the U.S. dollar became the sole currency of intervention in order to manage the damage of arbitrage (trading on a currency at different markets usually on short-term with a view to earning a profit) on the naira.
The Comprehensive Import Supervision Scheme (CISS) came into being through the Pre- Shipment Inspection of Imports Decree No. 36 on 1st January, 1979 with Societe Generale Du Surveillance (SGS) as the sole inspection agent. This development was an attempt by Lt.
General Olusegun Obasanjo’s government then at the saddle, to stem all sorts of fraudulent practices to siphon foreign exchange from Nigeria through bogus importation. SGS ran into troubled waters and was ditched in 1984. In 1990, they were reinstated and three other inspectors namely: Intertek Services, Cotecna International Limited and Bureau Veritas, appointed. The whole world was carved out for these inspectors to physically inspect and value all exports to Nigeria for which a Clean Report of Finding was issued for successful inspection.
It would be recalled that Nigeria then from about 1970 to 1985, was basking in the euphoria of oil boom which made the country a floodgate of importation of all sorts of things including bricks and sand.
3.1.2 Exchange Control Memoranda
According Esezobor (2009), 1984 was particularly special because it was that year that CBN in a circular dated 9th January created Exchange Control Memoranda, 22 in all, which specified what purposes ranging from basic travel allowance, business travel allowance, medical travels, payments for imports, personal home remittance and education amongst others, that foreign
exchange could be approved for. This reform also cleared the way for authorized dealers (banks) to handle the pre-import processing and registration for the private sector.
3.1.3 Reconciliation of Trade Bills
The year 1984 will also be remembered as the year Nigeria attempted for the first time to reconcile its trade debts through CBN. Through a circular referenced ECD/AD/10/84 dated 19th January by CBN, all exporters with outstanding trade debts in Nigeria were informed to submit their trade claims to Chase Manhattan Bank. The latter also gave publicity to this development.
Here in Nigeria, all importers and authorised dealers were required to submit to CBN, all their outstanding claims in respect of imports under the open account trading transactions, bills for collection, unconfirmed letters of credits and unpaid management and technical service fees.
The claim by both the exporter and importer were subsequently matched and refinanced by promissory notes issued to the exporters by International Creditor Institutions on behalf of the Federal Government. The exporters of the matched claims were notified to appoint a local agent for the purpose of collecting the naira cover deposited by the importers with various authorised dealers. The understanding was that such naira deposits which were not to attract interest would be used by the appointed agents to source foreign exchange in the unofficial market for remittance to the exporters. It was expected that such documents for the foreign exchange transactions including pre-SFEM transactions were not to be kept for more than 10 years.
3.1.4 Second-tier Foreign Exchange Market (SFEM)
SFEM came on the scene as the arrowhead of the Structural Adjustment Program through Decree No. 23 in September, 1986. It was primarily meant to remove the distortions in resource allocations with a view to finding a realistic value for the naira. It was also calculated to encourage domestic inventiveness especially in the export sector. Import and export licensing were abolished. Banks were authorised to sell foreign exchange in respect of eligible private sector transactions. To afford some protection to domestic enterprises, a great deal of rationalization of Customs and Excise Duties was undertaken. Meanwhile, the value of the naira had fluctuated and steadily depreciated in the following order up to this point:
1973 N0.64 / $1.00 1980 N0.55 / $1.00 1985 N0.89 / $1.00 1986 (March) N1.00 / $1.00 1987 (September) N4.64 / $1.00
The Babangida Administration at the time of the inception of SFEM said that the sharp fall in the value of the naira was to create the cash to boost the export of non-petroleum products in line with SAP.
3.1.5 Period of Deregulation, 1986 to 1994
The highlights of this period were frantic attempts by the government to hands off many of its enterprises. The longstanding 6 commodity boards were abolished in December, 1986. The existing 18 River Basin and Rural Development Authorities were reduced to 11 and mandated to concentrate on the development of water resources. The Directorate of Food, Road and Rural Infrastructures (DFRRI) was set up to support amongst other things, the construction of feeder roads.
In the meantime, the banks were brimming with excess liquidity which made difficult, the management of monetary policies. Stabilization securities and regular review of interest rates were introduced to stem the tide. The Paris and London Clubs debts were re-scheduled.
Expatriate Home Remittance was increased from 50 percent to 75 percent salary net of tax with effect from January, 1987. Advanced payment for import duty was reduced to 25 percent while the 75 percent became payable on arrival of the goods and submission of correct documentation.
Inter-bank Foreign Exchange Market (IFEM) was brought in as the instrument of foreign exchange allocation between 1988 and 1989.
3.1.6 Domiciliary Account/Crawling Peg
An innovation to encourage exporters was the setting up of an account called Foreign Exchange Domiciliary Account into which could be paid in foreign currencies, export proceeds. During the period, 1985 to 1986, the currency management approach was the Crawling Peg where two major currencies, the U.S. Dollar and the Pound Sterling were used as intervention points.
Between 1986 and 1989 inclusive, CBN tried as instruments of foreign exchange allocation many systems including the following:
Marginal Rate
Dutch Auction System
Merging of the first and second tier markets Inter-bank Foreign Exchange Market 3.1.7 Bureau De Change (BDC)
BDC was introduced in 1989 to reduce the pressure on the foreign exchange market. The operators were licensed to buy and sell foreign monies and encash travellers’ cheques from private sources on cash and carry basis. No documentation was required apart from stamping the passport of a buyer for Customs purposes.
The swing from deregulation to regulation continued in 1994. The date, 11th January, 1994 is special because it was this day that CBN’s hammer descended on open account and bills for collection as means of export payment with exemption for manufacturing companies. Thereafter, all export business in Nigeria apart from manufacturing companies, had to be by documentary letters of credit especially of the order of confirmed irrevocable or simply, the irrevocable type provided proceeds were repatriated within 90 days. In the policy statement on the issue, the
concession previously granted exporters to retain the proceeds of exports was withdrawn to allow CBN pool all export proceeds.
3.1.8 Guided De-regulation, 1995 to 1999
In 1995, the Exchange Control Act was abolished. To replace it, was the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree, 1995.
Government in 1996 handed over the management and disbursement of export incentives to Nigerian Export Promotion Council (NEPC). All uncontainerised imports valued $1,000 and below were exempted from pre-shipment inspection although all such goods had to be accompanied with Import Duty Report.
The maximum amount repatriated by expatriates working in Nigeria was pegged at 75 percent of salary, net of tax. 1997 would be remembered for policy reversals. The use of open account trading and bills for collection banned in 1994, was restored. The term ‘Basic Travel Allowance’ was changed to ‘Personal Travel Allowance’ and the long standing limit of $500 per person was completely removed. Also removed was the Business Trip Allowance of $5,000.
The 75 percent of net salary restriction for expatriate home remittance was similarly removed.
Textile, which had previously been banned as an import item, was restored.
The highlights of the foreign exchange measures in 1999 were as follows:
(i) The dual exchange rate where the official rate was pegged at N22.00 to dollar was cancelled.
(ii) Inter-bank Foreign Exchange Market (IFEM) replaced Autonomous Foreign Exchange Market (AFEM).
(iii) The pre-shipment policy for imports and exports was abolished to make way for destination inspection to be introduced in due course.
(iv) The various export incentives were modified under a system called Manufacture-in-bond Scheme whereby cash incentives hitherto given to exporters, were replaced with Negotiable Duty Credit Certificate to be used in paying for Customs Duties.
The banking system was kept busy in the year 2001 with the introduction of Universal Banking and wide fluctuations in the naira exchange rate with foreign currencies. IFEM eventually gave way for the return of the Dutch Auction System on 15th July, 2002. The widespread round tripping and other malpractices amongst banks saw the CBN banning 21 banks and about 50 others were put on surveillance.