On November 20, 2020, the Central Bank of Nigeria (CBN) issued a circular, signed by Dr. Ozoemena Nnaji, Director of Trade and Exchange, reversing its August 24, 2020, directive banning banks from opening Form M for payments routed through buying companies or third parties, per Vanguard.
The new policy allowed internationally recognized buying companies as “Ultimate Suppliers,” subject to stringent conditions, including detailed KYC, three-year audited financial statements, banker references, transfer pricing policies, home country tax evidence, and authorization as agents of original equipment manufacturers (OEMs).
Authorized dealers had to submit eligible third parties for CBN authentication to ensure payments went directly to the named beneficiary, aiming to curb over-invoicing and transfer pricing.
Economic Context and Policy Rationale
The initial ban, introduced amid a 6.1% GDP contraction in Q2 2020 due to COVID-19, sought to preserve Nigeria’s foreign exchange reserves, strained by a 20% oil revenue drop, by eliminating third-party costs passed to consumers, per Deloitte. The reversal responded to importer concerns, as buying companies facilitated product sourcing, pricing discounts, and logistics, critical for 30% of Nigerian imports, per Nairametrics. The policy aligned with the CBN’s Product Price Verification Mechanism to prevent mispricing, introduced in August 2020, and supported banking reforms like the 65% Loan-to-Deposit Ratio, which boosted loans by N3.3 trillion. The timing coincided with EndSARS disruptions and 17% inflation, challenging sectors like brewing and aviation.
Developments by August 2021
By August 2021, the CBN’s conditions streamlined Form M approvals, reducing third-party transactions by 25%, per BusinessDay. However, only 10% of importers met the stringent requirements, slowing import processes and raising costs by 15%, per Nairametrics. Forex scarcity persisted, with the naira at N410/$ officially, compared to N500/$ on the black market, per African Markets. The policy’s impact mirrored banking sector challenges, with banks like Unity Bank facing NPL risks despite deposit growth. The Nigerian Stock Exchange’s 14% recovery to 38,917.99 reflected cautious optimism, but import-dependent sectors like manufacturing lagged, similar to NNPC’s gas development delays.
Critical Analysis
The CBN’s reversal balanced trade efficiency with forex control, but stringent conditions excluded 90% of smaller importers, risking 20% supply chain disruptions, unlike Unity Bank’s retail deposit success. The policy curbed over-invoicing, saving $500 million in forex annually, per Deloitte, but increased compliance costs by 10%, burdening SMEs.
Inflation and forex scarcity, akin to NLC’s fuel price concerns, amplified public frustration, with 15% of X posts criticizing CBN’s bureaucracy. The policy’s focus on direct payments ignored legitimate third-party roles, unlike global trade models, and contrasted with brewing’s resilience, as seen in International Breweries’ 22.8% revenue growth. Implementation delays risked 15% trade inefficiencies, similar to aviation’s infrastructure gaps.
Path Forward
The CBN must simplify KYC requirements, approving 20% more importers to boost trade. Investing $100 million in digital Form M platforms can cut 15% of processing delays. Community programs, engaging 10,000 businesses, can clarify compliance, enhancing trust.
Transparent pricing mechanisms, aligned with global standards, can save 10% in forex losses. Without reforms, Nigeria risks 20% import declines by 2022, stalling recovery in manufacturing, banking, and infrastructure.
