Nigeria: Allocations – CBN Now Pays States in Dollars
Nigeria, 01/17 – With effect from this month, the Central Bank of Nigeria (CBN) will begin payments from the federation account to states in US dollars.
The dollar payment, which is one of the four pillars of the CBN`s “Strategic Agenda for the Naira” originally billed to be implemented last September, is geared towards strengthening the nation`s currency, the naira, and managing liquidity in the economy.
Already, the banking watchdog has paid the $1.8 billion refunds from excess Paris Club exit debt to states last month.
A circular containing guidelines for the dollar payments addressed to banks and obtained by THISDAY states: “Sequel to the payment of the Paris Club, from the excess crude deductions from their statutory allocations in the process of effecting the payments, the following guidelines are to enable designated banks make refunds of excess deductions to affected states.
“1.The CBN shall transfer the US Dollar amount allocated to the respective states to the offshore FEM of the designated banks.
“2. The banks shall credit the domiciliary account of the beneficiary state with the amount allocated to them as soon as the accounts are created.
“3. Any interest accruing to the amount from the date the banks are credited by the CBN to the date the funds are paid into the domiciliary account of the state shall be transferred to the beneficiary.
Furthermore, banks shall also pay appropriate interest on the balance in the domiciliary account pending utilisation of funds by the states.”
The circular, which was signed on behalf of the CBN`s Director of Foreign Operations by one J.J Aluko, however, stated that banks shall not be allowed to effect disbursement of funds from the accounts to their states in US dollar cash.
“Drawing from the accounts shall be made in naira at the prevailing inter-bank exchange rate on the date of the request from the state. However, states can utilise the funds in their accounts to effect offshore payments in respect of eligible transactions including opening of letters of credit subject to appropriate documentation and authorisation by the state governor,” the circular stated.
The three other pillars, which form the phase two of the CBN reforms, are the naira redenomination that was suspended last September, the current acc-ount liberalisation/convertibility and accession to article V111 of the International Monetary Fund (IMF) as well as inflation targeting for the conduct of Monetary Policy, which are billed to commence by January 1, 2009 respectively.
As a result of the structure and development of Nigeria`s financial system, the underdeveloped nature of the foreign exchange markets, as well as the restrictions on foreign exchange transactions, the CBN until last December had traditionally fully monetised the foreign currency receipts in the Federation Accounts, to be shared by the three tiers of government.
Initially, the CBN also maintained the accounts for all the tiers of government – as part of the liquidity management framework. Subsequently, as the banking system developed, the CBN allowed the share of the states and local governments to be deposited with the commercial banks.
Beside strengthening the naira, the dollarisation of states` allocation provides an additional instrument for effective liquidity management by the CBN. Given the fact that Nigeria earns dollar from its crude oil export, which constitutes more than 90 per cent of her earnings, if the apex bank disburses such funds to states in naira, it would have to print additional naira – thus pushing additional funds into the economy.
This will naturally increase the demand for the dollar and weaken the naira, according to experts.