Foreign currency sales to the Bureau De Change and Exchange rate stability – The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, readout choices made by the country’s banking sector’s highest decision-making body last week, which came as a shock to Nigeria’s financial system.
The CBN’s Monetary Policy Committee (MPC) held its 280th meeting on July 26 and 27, 2021, where it kept all policy parameters unchanged but announced the end of weekly foreign currency (FX) sales to the Bureau De Change (BDC) segment of the money market.
As a result, the BDC market in Nigeria fell into a tailspin at the start of the week as dealers worried about the CBN’s decision.
Since then, fund managers, manufacturers, financial and economic specialists, as well as Nigerian individuals at home and abroad, have been debating the issue from many angles.
However, considering the CBN’s low foreign reserves, oil price uncertainty, and rampant price gouging by unscrupulous BDC traders, observers see the CBN’s decision as to the prudent course of action.
They say that once commercial banks begin to offer retail amounts of money to customers through various banking hall desks across the country, the high BDC rates will begin to fall.
Why this decision?
The CBN made the decision in response to what it saw as willful and reckless abuse of the terms on which foreign exchange (FX) was sold to dealers.
“They have broken their deal and have gotten selfish and resistant with unnaturally huge gains from these sales, while regular Nigerians have been left to feel the agony and therefore suffer.”
Godwin Emefiele, the governor of the Central Bank of Nigeria, said this when announcing the suspension of currency (FX) sales to BDC operators.
Emefiele claimed they had become a conduit for graft and corruption, and he went so far as to criticize embassies and international organizations for transacting through BDCs while in the country.
He promised to go after the Nigerian banks that facilitated the transactions “ruthlessly.” Simultaneously, the apex bank stated that it would report these overseas corporations that “patronize” BDCs to their respective foreign regulators.
The BDC market’s rates fell from N500.00/$ on Monday, July 26, 2021, when the CBN’s Monetary Policy Committee (MPC) began its 280th meeting, to N520/$ on Tuesday, July 27, 2021, when the CBN announced its plan to discontinue selling weekly dollars to the parallel market.
The CBN’s policy decision was motivated by allegations of widespread violations of the sales and pricing rules that should have guided BDC transactions. The CBN regarded BDCs as a way for retail buyers to get FX for a range of non-visible transactions like paying medical bills, school fees and allowances, and other miscellaneous charges. These FX purchasers often required $5,000 or less in cash.
“Licensed BDC operators took an aim at the eye of the CBN policy by engaging in wholesale trading activities at rates that were a premium to those of commercial banks,” according to Proshare Research analysts.
As a result, banks are purportedly using BDCs as conduits to arbitrage greater FX profits, depleting the traditional bank-based wholesale industry of funds. FX rent-enormous seeking’s profits were like honey to a bee. It was so appealing that it prompted a flood of additional license requests from high-net-worth individuals who saw the BDC market as a risk-free secondary source of income flow.”
Mr. Bismarck Rewane, Managing Director/Chief Executive Officer of the Financial Derivatives Company (FDC), believes the CBN made the right decision.
According to him, the BDCs will acquire dollars at N400 and sell them at N500 to a dollar within an hour.
According to him, there were 74 BDCs in Nigeria in 2000, but by 2010, the number had climbed 27-fold, from 74 to 2000, and by 2020, the number would have risen to 5,000.
According to the Nigerian Tribune, there were 5689 licensed BDC operators as of June 30, 2021. During the press conference, the governor also stated that 500 license applications are received each month and that no new BDC licenses will be processed or issued in the future. This also applies to licenses that are presently being processed and for which the apex bank has begun the refunding of minimum paid-up capital and licensing fees.
When comparing the value of dollar demand to debt servicing, Rewane claimed in a Lagos-based TV interview that the Federal Government, or CBN as it is known, spent more on tourism in the last quarter than debt servicing.
Nigeria spent $472 million on travel and tourism, but $173 million on debt servicing, he revealed.
He stated, “No country in the world can withstand this hemorrhaging.”
The CBN, according to Rewane, must take action since claiming to be licensed by the Central Bank is “water under the bridge.” He described what was going on as “daylight theft,” saying that the depreciation of the Naira merely indicates that demand will plummet.
The first stage, according to the economist, is to stop everything, as the apex bank has done, which he describes as administrative control.
“However, the difficulty is that administratively stopping something creates a new black market premium.
I agree with the Governor of the Central Bank of Nigeria that people should go to the bank, but when administrative controls are used, individuals suffer a little.
“You and I both know that putting 50 flies in a matchbox is easier than strolling into a bank and walking out in the next five minutes. As a result, individuals will bear the pain,” Rewane explained.
In terms of what the CBN should do, he believes the best answer is for the CBN to sell to the BDCs at parallel market rates, less 5%. The CBN should sell to BDCs at N490 to a dollar if the parallel market exchange rate is N500 to a dollar.
The N10 margin, he argues, is lower than the N100 margin.
The CBN spends $100 million every week, $440 million per month, and $5 billion per year on travels, according to Rewane.
He also suggested that having a market and administrative solution functioning together is the best option because administrative solutions are always vulnerable to exploitation. People should travel to the bank to collect their dollars, but those in a hurry, such as smugglers, should pay the parallel market rate for foreign exchange.
Approximately $110 million was sold to BDC operators per week prior to the halt of supply, but this amount will now be re-channeled to commercial banks to meet legitimate FX demands identified in the CBN’s FX manual.
Will it be a repeat of the 2016 episode?
This isn’t the first time the CBN has slammed the brakes on BDCs. For the same reasons indicated at the last MPC meeting, it halted selling FX to BDC operators in January 2016 and amended their business parameters. The Naira declined by -54.94 percent at the Investors and Exporters (I & E) FX window at the end of 2016, while it depreciated by -76.25 percent at the BDC window.
Another factor that contributed to the Naira’s depreciation in 2016 was a drop in foreign oil earnings, which was accompanied by a drop in oil prices.
In 2016, the country’s foreign reserves were also under strain; by the end of the year, the average annual foreign reserves had fallen by -14.39 percent year-on-year (Y-o-Y) to an average annual number of $26.28 billion.
Recent occurrences, according to observers, appear to be a return to 2016. The reality of 2021, on the other hand, have a few quirks. The CBN adopted the NAFEX rate in 2021, changing the Naira from N379/ $ to N410/ $, however, the average year-to-date (YTD) price of oil is $64/b as of 1 July 2021, with production volume at 1.45 million bpd. The foreign reserve has also decreased by -5.71 percent year to date.
Finance and economic experts from Lagos-based investment banking and research business Afrinvest (West) Africa Limited have proposed five strategic actions to avoid a repeat of what happened in 2016 when the Central Bank of Nigeria (CBN) restricted dollar sales to Bureau De Change (BDC) operators.
“First, we propose that the CBN give greater clarity on its exchange rate strategy in order to gain the confidence of foreign portfolio investors,” the experts stated.
We urge that banks be given more FX allocation so that they can meet all genuine needs. Finally, we recommend that the CBN reduce the FX processing requirements for banks in order to draw Nigerians into the formal FX loop.
“We recommend that the CBN raise public awareness about the importance of embracing new developments in order to avoid unfavorable reactions that could encourage further speculative trading.
Finally, we urge that the CBN offer more money to local producers of the 44 commodities that are currently prohibited from accessing FX at the official rate, in order to reduce the likelihood of greater costs being passed on to consumers.”
According to Afrinvest analysts, the 2016 decision failed because limited FX supply to banks (from the CBN) and clients’ apathy about banks’ lengthy procedures maintained parallel market demand high.
Despite the pressure on the Naira, the Proshare analysts predict that “the Naira would bounce if the CBN maintains loyal to its statement of an ongoing supply of FX to commercial banks and the commercial banks stay committed to the execution and implementation of the policy.”
“Does the provider of FX matter in the case of falling FX earnings or should attention be redirected towards shoring up supply?” the analysts ask rhetorically.
How effective will commercial banks be in putting the new policy into effect?
Will FX buyers have to deal with bureaucracy and delays when obtaining FX from commercial banks?
The jury is yet out on how much the Naira to Dollar exchange rate will fall, but importers and home consumers will bear the brunt of the loss, as import costs and domestic prices continue to grow.
The CBN’s decision has tossed the cats among the pigeons, and unlike in 2016, when a fast policy reversal resurrected the BDC industry, this time, with the economy vulnerable and the government bleeding cash, not too many pigeons will stay in the FX courtyard for very long, according to analysts.
What the banks are saying
According to the Body of Bank Chief Executive Officers (CEOs), the banking industry is prepared to sell foreign currency to all genuine customers as ordered by the Nigerian Central Bank (CBN).
Herbert Wigwe, chairman of the Body of Bank CEOs and Access Bank MD, claimed banks have more resources than BDCs to service clients’ forex demands during a virtual media briefing last Thursday.
“The CBN’s approach is excellent since it would provide consumers with more options for collecting their Personal Travel Allowances (PTAs), Business Travel Allowances (BTAs), and school tuition for their children,” he said.
“This is only to keep you informed about the banking industry’s preparation so that you can assist us to communicate to the market that we are ready to take on this responsibility.”
Wigwe said the CBN had sent a circular to all banks instructing them to establish a designated site to satisfy customers’ forex needs, and that the service would be provided at no additional cost.
“They may not have achieved 100% across the country, but they are doing so right now, and there is more than enough forex to meet their requests. “There isn’t a single extra payment for any of these things,” Wigwe explained.
Customers could begin strolling into banks to be served, according to Segun Agbaje, Group Managing Director of GT Holding Company Plc, who spoke at the event.
He reassured the public that banks will be able to meet their consumers’ expectations.
“The rates we observed yesterday and today are a pure anomaly, and if my memory serves me well, BDC money comes in at N412 and the banks sell it at N412,” he continued.
“With this development, clients have a bigger network to buy from, and I can assume the rates will fall down. If you are traveling today, it would be extremely easy to buy at N423 or N425.”
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The position of the BDC operators
“No one will blow your trumpet for you if you don’t blast your trumpet,” it is claimed. As a result, the Association of Bureaux De Change Operators of Nigeria (ABCON) issued a forceful statement in response to the situation.
They reassured the public that BDCs continue to offer foreign exchange services.
The assurance was signed by the ABCON President, Aminu Gwadabe, who stated that the CBN’s recent declaration did not prevent BDCs from providing foreign exchange services as permitted by their operating licenses and operational standards.
He went on to say that while the CBN’s dollar sale had helped to boost supplies, BDCs are still able to get forex from other sources and provide a variety of services to the general population.
“While the CBN has ceased selling dollars to BDCs, it has not revoked their operating licenses or prohibited them from offering forex services to the general public,” he continued.
“At ABCON, we encourage our members to view the CBN announcement as a wake-up call and an opportunity to broaden and deepen their consumer base and company.
ABCON has always collaborated with the CBN to ensure the smooth operation of the foreign exchange market, and it has stated that it will continue to do so in order to address and resolve all of the issues that led to the recent action, including the identification and sanctioning of earring BDCs as needed.
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