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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AfCFTA Implementation Strategies-Part-4: Lessons From The Challenges of ECOWAS FTA

The implementation of the AfCFTA for the benefits of Nigeria is a very important programme. This is because it is very critical for the growth of Nigeria and that of the African continent at large. If the Free Trade Agreement (FTA) among the 500 million population of the European countries that formed the European Union has helped them to contribute about 34% of world trade in manufactured goods out of which about 65% were done among EU member countries, I strongly believe that the AfCFTA among over 1 billion Africa countries can grow the export value of Africans from 2.6% to more than 10% in 10years. However, for this to happen, we must be ready to do the work necessary to overcome the challenges that will militate against the successful implementation of the AfCFTA.

This is the fourth in the series of Articles on AfCFTA implementation strategies and it will continue from were we left off last week on the challenges of FTAs. However, this article will be focused on the peculiar challenges that have hindered the implementation of ECOWAS Trade Liberalisation Scheme (ETLS) which is a 29 years old FTA in West Africa. The potential opportunities of ETLS have remained untapped since inception. The reasons for the very low level of utilisation of this FTA has been attributed to different challenges by different researchers from within and outside the region.

According to the 2017 report of Deloitte on ETLS, the issue of inadequate information about the ETLS and hence the low awareness of the scheme among the businesses in the region stood out as a major impediment to the full utilisation of the FTA. Deloitte went further to state that the fact that some few businesses are using ETLS should have made the news of the benefits to spread but the bad experiences they had in trying to utilise the scheme had made it unpopular among exporting companies in the region. The issue of lack of awareness of ETLS among qualified companies in the region have also been underscored by other researchers. They stated in their report that the inadequate sensitisation and awareness about the scheme, the lack of information about the content of the scheme and how to go about the registration of products in order to access the numerous benefits of the FTA is a major challenge that is being faced by companies in the region.

The lack of information and awareness of the details of the scheme is not just on the part of the companies that should be exporting, there is another dimension to it and this time it is among the agencies of government at the borders of the ECOWAS member states. This ignorance is said to manifest via the demand for the payment of the tariff by the border agencies of some member states. This denial of access to the duty-free entry for goods registered under the ETLS with valid Certificate of Origin (CoO) has also been reported from the survey done by Deloitte in 2017. It went further to state that even in situation where the CoO was accepted, the border agencies tend to delay in assisting with clearance of transit trucks from the entry and exit borders of the member states.

Apart from the fact that some qualified companies have either not heard or have a good understanding of how to access the benefits of ETLS, another challenge is the fact that even those that have been able to register their products and attempt to utilise the FTA are discouraged by the illegal and numerous road blocks being mounted by the border officials. These road blocks do not just cause delays, it is also used by these agencies to obtain illegal fees from the trucks and all these have led to the increased cost of transportation within the region. These illegal roadblocks and checkpoints cause the movement of freight to be delay because trucks are kept stationary for a very long time.

In addition to this, the 2009 report of the West African Trade Hub of the United States for International Development (USAID) on the gap analysis of the ETLS went further to state that the truck driver were being harassed by these government agencies at these roadblocks. The report of International Trade Centre in 2016 also substantiate this by stating that a lot of impediments in import-export procedures in the ECOWAS region often occur at the Customs authorities and these are due to inadequate and old equipment, delay in custom clearance and unnecessary bureaucracies. Another factor that is negatively influencing the utilisation of the West African FTA is the non-tariff barriers such as product registration, packaging requirements, product certification, technical inspection and testing, quantity restriction and import-export licensing. 

Finally, I have taken time to highlight all the challenges of ETLS above in order to give a glimpse of the likely challenges that the AfCFTA implementation committee members have to prepare to tackle in order to successfully implement the AfCFTA. I will commence the proposed solution to tackling these challenges in one of the subsequent edition of this article. It is my hope that the government will adopt some of the recommendations that will be prescribed in order to make the implementation of the AfCFTA create the necessary jobs that will lift out of penury, the tens of millions of Nigeria that are currently living below the poverty line.

Bamidele Ayemibo/bayemibo@3timpex.com 

Lead Consultant 3T Impex Trade Academy

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