Sunday, August 4, 2019

CBN Export Policy Against Open Account Is A Threat To AfCFTA and Non-Oil Export Growth

The Central Bank of Nigeria (CBN) is set to implement a policy that technically placed a ban on the use of Open Account trading (also known as Cash Against Document) on exportation from Nigeria. This policy has the tendency to slow down export growth and prevent Nigeria from being part of the $16 trillion trade transaction done on this term, which also amount to about 85% of global trade. It will reverse the upward trend currently seen in the non-export volume and make the signing of and plans to take advantage of the African Continental Free Trade Agreement (AfCFTA) a waste of time. This policy is being done on one hand through the recently released foreign exchange manual that omitted Open Account as a payment method for exportation from Nigeria and on the other hand, it is being enforced by omitting Open Account as a payment method on the current application being developed by the CBN to automate the processing and documentation of non-oil exportation from Nigeria. Both the manual and the application stated that the payment method for export out of Nigeria will now be Letter of credit (LC), Bill for Collection (BC) and Advance Payment (AP).

By way of definition, Open Account (Cash Against Document) trading is said to happen in international trade when an exporter ship goods to the buyer abroad and also sends the shipping documents to the buyer in order to be able to clear the goods and effect payment for the goods at a later date. This method leaves the exporter exposed to the risk of payment defaults. This then prevents the exporter from being able to repatriate the funds for the shipped goods back to the country. Since CBN has technically ban this payment method by omitting in both the foreign exchange manual and the application being developed for export processing, we are then left with other payment methods like LCs, BCs and APs. 

Declining Usage of Letter of Credit
The philosophy behind this policy is to ensure that all the export proceeds resulting from shipments of goods out of Nigeria are duly repatriated. Even though the reason for this policy is good, however, I think the way the CBN is going about the enforcement of the repatriation policy is wrong. This is because this policy is a typical example of throwing away the baby with the bath water. This is because the policy has the tendency to badly affect the volume of non-oil export trade from Nigeria since the other payment methods (like LCs, BCs and APs) that are allowed constitute less than 15% of global trade. According to a 2010 report of Society for Worldwide Interbank Financial Telecommunication (SWIFT), the LCs issued for trade transactions in the world constitutes about 9.3% of total volume of world trade while BCs constitutes just 1.4%, Open Account is about 85% while other payment methods including AP constitutes about 4%. The 2019 global trade finance report of the International Chamber of Commerce (ICC) showed that from 2013 to 2017, there has been about 12.7% reduction in the usage of LCs for trade transactions across the world. The report of Unicredit Group in 2015 showed that the ratio of LCs to Open Account usage which used to be 80% to 20% respectively in 1978 is now 19% to 81% in 2013. The report went further to state that “the world trade volumes have seen a startling increase in open account transaction over the recent years. Already today more than 80 % of the total world trade volume (export) is settled by clean payment (open account). This impressive ratio is expected to grow even further in the future. Therefore, banks are compelled to offer their corporate clients, products that support fully automated processing as well as cost savings combined with payment assurance and financing options”. 

Why Open Account Trading is Growing 
The decline seen in the usage of LCs and BCs in trade transactions despite the increase in the trade volume in the world has been attributed to several reasons and some of them include the following: Operational and transactional inefficiency due to paper handling, filing of documents and retrieval of the trade transaction files; Extended transaction timeframes caused by discrepancies in the document presented on LCs transactions and this has been stated to affect 70% of the trade transactions in the world; Delays in settlement caused by seeking for waivers on discrepancies; High cost of trade caused by commissions and charges of LC and amendments; Transactional and operational risk caused by buyer refusal of the goods or seeking for discount base on discrepancies. 

The reason why CBN can afford to take this step despite the far reaching negative impact that could result in the non-oil export sector is likely because the management is either not aware of the volume of trade done via Open Account and hence the implication of banning it or the management is thinking that if the restrictions on Open Account trading worked for import, then it can work also for export. I don’t think the first option is case because that level of ignorance will be an indictment on CBN as highly placed organisation. However, if the CBN is doing this because of the second reason, which means if it worked for import, then it can work also for export then the CBN need to be educated on the driver of Open Account trading in the world. The global shortage of trade finance is contributing to an intense competition in export markets. This is especially the case is less developed markets. Because many importers cannot arrange import financing sufficient to book purchases, exporters are unable to find enough importers to purchase their goods. Exporters are therefore compelled to offer Open Account terms to importers or lose sales to their competitors. Therefore, it worked when it was done for importation because it is safer for the seller, buyers generally have option to buy from another seller and Nigeria is a big market that every seller wants to enter. However, the current reality will not allow the policy to work in our favour on the export side.

Negative Impact of Stopping Open Account Trading 
The implication of this technical ban on Open Account trading in Nigeria is going to be a significant decline in the volume of non-oil exportation because: One, it will cause the Nigerian exporters to loose business their competitors since many competitors will be willing offer Open Account terms to potential buyers. Two, this action will lead to increased level of illegal exportation. That means, many exporters are going to start shipping goods out of the country without documentation. This will be a repeat of what happened during the last economic recession when many exporters stopped using NXPs to process their export transactions through the banks due to the losses they were incurring by being forced to sell their export proceeds to the banks at a loss whenever they process NXP. Three, if CBN is able to prevent illegal exportation through the sea, there will be a surge in the exportation out of Togo, Benin and Ghana because many Nigerians are going to be shipping their goods out of Nigeria via road and then ship it out of these neighbouring countries via sea. This is already happening especially from the northern part of the country due to the delays at the Lagos port and this ban is only going to further aggravate such practices and lead increase in such shipments. All these are going to have a negative impact on exportation in Nigeria and make the current drive towards increase in non-oil export and implementation of AfCFTA a waste because the inflow of the export proceeds will start declining very fast. 
Recommendations To CBN
Instead of running away from Open Account trading, the question we should be asking is, how are other nations of the world able to do use this method and still get the proceeds repatriated? It is obvious that they have found a solution that we are yet to search for. First thing first, I think the CBN needs to first work with the relevant agencies to reduce the delays at the Lagos port which currently handles about 60% of the shipments out of the country. Also, there is a need to effectively track all shipments out of Nigeria by ensuring that the shipping lines have access to the current application being designed by the CBN to drive exportation. This is to ensure that the shipping lines pick up the NXP numbers of all shipments from the systems by themselves and not relying on the exporters to provide it for them. This will curb the incident of forged NXP numbers currently used by some exporters to do illegal exportation. This will reduce illegal export via the seaport and help the CBN to capture almost all exports out of Nigeria. After this, the CBN needs to educate all exporters across the country together with their banks on the implication of non-repatriation of export proceeds and also sanction the exporters and NOT the Banks for non-repatriation. However, before they are sanctioned, the CBN needs to train them on how to prevent the risk of payment in their export transactions. Kindly note that, 3T Impex Trade Academy has identified seven ways to prevent the risk of payment default in Open Account trading and we are willing to partner with CBN to deploy this training programme for exporter across the country. Implementation of the sanctions on erring exporters after the training will greatly deter others from repeating this unpatriotic act.

Conclusion 
In conclusion, I will like to appeal to and plead with the CBN to rescind on its decision to technically ban the use of Open Account trading as payment methods in Nigeria. This is to ensure that the current increase in volume of non-oil exportation out of the country does not nosedive, so we don’t end up building the economy (and non-oil export volume) on one hand and then using our own hand to destroy it at the same time.

For love for growth of trade in Nigeria and Africa in general.

Bamidele Ayemibo/bayemibo@3timpex.com 
Lead Consultant, 3T Impex Trade Academy

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