Naira May Slide As CBN Bans Forex Sale To BDCs – LEADERSHIP NEWS

The Naira is set to further depreciate in value as the Central Bank of Nigeria (CBN) yesterday stopped sale of foreign exchange to Bureau de Change operators (BDCs)  across the country.

The apex bank yesterday announced the immediate discontinuation of the sale of foreign exchange to BDC operators, saying they have become a conduit for illegal financial flows working with corrupt people to conduct money laundering in Nigeria.

The CBN also suspended the issuance of new licences to money changers across the country with immediate effect.

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Governor Godwin Emefiele, during a media briefing at the end of the monetary policy committee (MPC) meeting yesterday, said that henceforth the apex bank would sell forex to deserving Nigerians through the commercial banks.

This confirms LEADERSHIP’s earlier story on the need to harmonise the multiple exchange rates in operation, a situation that worried multilaterals and foreign portfolio investors (FPIs).

LEADERSHIP had exclusively reported that there were more than five different rates in the nation’s foreign exchange market, thus giving considerable advantage to middlemen, with an average difference of 50/$, who keep smiling to the bank and providing opportunities for arbitrage and round tripping.

The CBN has sold a minimum of $5.3 billion to BDC operators in the 11 months between September 2020 (when the CBN resumed sale of forex to BDC operators post-COVID-19) and July 2021.

The CBN had since last September been supplying a minimum of $120 million to the over 6000 licenced BDCs in the country at $20,000 to each operator every week.

Emefiele said: “The BDCs were regulated to sell a maximum of $5,000 per day,  but CBN observed that they have since been flouting that regulation and selling millions of dollars per day.

“The CBN also observed that the BDCs aid illicit financial flows and other financial crimes.  The bank has thus decided to discontinue the sale of forex to the BDCs with immediate effect.

“We shall, henceforth, channel all forex allocations through the commercial banks,” he said.

He urged the commercial banks to ensure that every deserving customer got their forex demand, adding that any bank found circumventing  the new system would be sanctioned.

“Once a customer presents all required documentation to purchase forex, the commercial banks should ensure they get the forex.

“Any customer that is denied should contact the CBN on 0700385526 or through the email- cbd@cbn.gov.ng, ” he said.

naira and dollar

The CBN governor stressed that the apex bank “will deal ruthlessly” with commercial banks that are collaborating with the BDCs who sell dollars at the black market.

“It’s a huge haemorrhage on our scarce resources,” Emefiele said, adding, “BDCs have turned themselves into agents that facilitate graft.” He assured that CBN would henceforth discourage the sale of forex to BDCs.

He noted that the BDCs had continued to make huge profits while Nigerians suffered in pain due to inflation of the amount of forex sales above the official rate.

BDC operators have long been a major source of forex to the parallel market, providing exchange rate support to those unable to formally access foreign currencies directly from the CBN.

Some analysts have expressed concern that the suspension of their ability to source foreign exchange from the CBN could have a significant impact on the country’s economy and bring naira under further pressure and depreciation.

Also they have predicted imminent scarcity of the dollar in the country as well as massive job loss for operators of the BDC who may find it difficult to remain in business, just as there are fears among operators of small and medium scale enterprises over scarcity of forex to drive their businesses.

However, the value of the naira at the parallel market yesterday remained stable at N504 per dollar, a position it has maintained since the beginning of the week.

But analysts say they expect a further devaluation of the currency in the wake of the announcement as the effect settles in.

When LEADERSHIP visited Wuse Zone 6, a major street (parallel) market for sale of forex in Abuja yesterday, it was observed that the market had not started reacting to the new CBN action, as the traders in the hard currency were seen doing normal transactions.

Many had expected panic buying of the green back currency, but Alhaji Ibrahim Tanimu, a BDC operator in the area told our correspondent that he was just hearing of the ban of forex sale to the operators.

“I’m just hearing that CBN has stopped forex sales to us. Well, as you can see, we are yet to see that in reality. It is too late to say anything more than that now. Let’s watch how it will be in the next few days,” Alhaji Tanimu said.

Some currency traders in the parallel market who spoke with LEADERSHIP noted that the market was closing when the news filtered in and they expect the value of the naira to further depreciate in the coming days as they envisage increased demands.

According to  head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, while the decision is part of moves by the CBN to sanitise the foreign exchange market, it would in the immediate term lead to a devaluation of the naira.

“It is part of the moves by the CBN to sanitise the forex market, to try and reduce the impact of speculators, because there are some schools of thought that believe that the high rate we have in the parallel market is not driven by real demand but by speculators, those hoarding with the belief that they can make gains from further devaluation of the naira.

“We expect that in the near term it will take some time for banks to be able to appropriately address the demand and the rate will actually go up. We expect that there will be further devaluation of the currency but over time it is expected to moderate.

“So initially we expect rates to go up because all the BDC operators will be sourcing for dollars from other sources but ultimately if they can sanitise the market and the banks can provide appropriate avenues then we can see the rates return to normal.

Olubunmi noted that due to several restrictions and policies  as well as the challenge of “how messy the market is”, a lot of banks actually shy away from forex sales.

“A lot of banks try to avoid any form of forex trading but now that they are forced to do it, of course the best way for you to even get your basic travel allowance (BTA) is to go through the bank. I don’t think it is a problem of capacity but a problem of meeting up with the different policies. The banks don’t even want their staff to be distracted, some banks don’t want to put themselves in a position where staff will be roundtripping and the CBN will fine them, so everyone just tries to avoid that particular area. But now they will be forced to do it.”

“There are still some issues that need to be addressed, there are some transactions that are not illegal but if you want to go through the official route it will take forever to get it done, so those are the things that the CBN needs to address” he stated.

Also, analysts at Cordros Capital said in the short-term, “we expect the new development to lead to further pressure on the exchange rate in the parallel market given the lag between commercial banks settling to adjust to the CBN’s directive and knee jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure.

“Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates.”

Also reacting, head, retail investment, Investment Management Group at Chapel Hill Denham, Ayodeji Ebo, noted that the initial reaction would be that there will be a scarcity of dollars in the parallel market.

“This means that the dollar rate will go up and naira will depreciate at the parallel market. There are many items that are not on the CBN list that still require funding or investment. The banks will not sell dollars to you to buy Eurobond. So there will be scarcity because the demand is still there.

“Banks have the capacity to meet the PTA/BTA demand but the main thing is that the BDCs are not just selling for PTA and BTA alone, they are one of the major suppliers to the black market where people source dollars for items that are not on the CBN list. Those that want to import and are not getting enough dollars, everyone goes to that market.”

Economic analyst, Stephen Kanabe, said the measure will wipe out the employment opportunities created in the BDC sector with over 6000 BDCs, with several others waiting to be licenced.

Kanabe said the gap between the AFEX rates and parallel market rates is likely to widen further with dollar shortages in BDC and parallel market segments.

“Going forward, the CBN should ensure that purchase of forex via the banks which will now increase is made stress- free with minimal documentation. This is what pushes people to the parallel market,” he stated.

An economist and the former director-general of Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf said: “What is happening in the foreign exchange market is a consequence of the CBN policy choice of a fixed exchange rate regime and administrative allocation of forex.”

He explained that it is a policy regime that has created a huge enterprise around foreign exchange; round tripping, speculation, over invoicing, capital flight among others.

According to Yusuf, the action of the apex bank amounts to tackling the symptoms rather than dealing with the causative factors, which is not a sustainable solution.

“It is regrettable that the CBN does not believe in the market mechanism. Yet market systems are time-tested as instruments of efficient resource allocation in leading economies around the world. Of course, market failures are recognised in economics, and these are exceptions that can be identified and dealt with.

“Suppressing the market is like swimming against the tide. It is a difficult battle to win. He pointed out that “Moving retail forex transactions from BDCs to the banks is like kicking the can down the road. The same issues would manifest even with the banks.”

He explained further that managing a subsidy regime is typically a herculean task, saying “We have seen this happen with fertiliser subsidy and petrol subsidy. The story cannot be different from foreign exchange.”

On the way out of this foreign exchange conundrum, he said it is for the CBN to allow the market to function, adding that it is also imperative for the apex bank to de-emphasise demand management and focus on strategies to stimulate forex inflows.

He added that “A fixed exchange rate regime is a major disincentive to inflows and creates enormous pressure of demand for forex. It is a contradiction in terms.

“The CBN needs to give the market a chance. Its current approach would continue to deepen distortions in the economy, perpetuate round tripping, fuel speculation, suppress forex supply and boost underground economy.”

On her part, Onyinye Dallas of Olymp Trade, noted that the decision by the CBN will in the long run help normalise the value of the naira. Although she noted that the decision may later on be reversed, Dallas said it will correct the anomalies in the foreign exchange market.

Also commenting on the CBN actions, Prof Uche Uwaleke, professor of finance and capital market and former commissioner for finance Imo State, said the decision by the CBN to stop forex sale to BDCs has merits and demerits.

“I think it is in the best interest of the Nigerian economy,” Uwaleke said.

The latest move by the bank is consistent with the move by the CBN to unify exchange rates and bring more transparency to the forex market.

Exchange rate unification is in line with the IMF and World Bank’s recommendations and so improves the country’s profile and credit standing before International financial institutions. It signifies that the country is serious in her reform efforts.

Professor Uwaleke said the CBN’s decision “will slow down the rate of depletion in external reserves.

“The move is likely to check round tripping of forex and reduce supply of forex in the parallel market. Further, speculative demand for forex is also likely to reduce. I am aware that BDCs have been accused of being vehicles for bribery and corruption. This will likely reduce.”

Meanwhile, the MPC yesterday retained all monetary policy parameters around the Monetary Policy Rate of 11.5 per cent. “In summary, MPC voted as follows; one, retain MPR at 11.5 per cent; retain the asymmetric corridor of +100/-700 basis points around the MPR; retain the CRR at 27.5 per cent; and retain the Liquidity Ratio at 30 per cent.”

However, chairman of the Independent Corrupt Practices and Other Related Offences Commission (ICPC), Prof. Bolaji Owasanoye said the private sector was responsible for over 60 per cent illegal movement of funds from Africa to foreign countries.

Prof. Owasanoye made this known during the visit of council members of the African Bar Association (AFBA) led by its president, Mr. Hanniba Uwaifo to the corporate headquarters of the ICPC in Abuja.

The ICPC boss stated that the perpetrators of illicit financial flows (IFFs) channell the funds through commercial activities enabled by the private sector.

He said, “A bulk of corruption going on in the country is caused or perpetuated by the private sector. About 60 per cent of funds taken or stolen away from Africa through illicit financial flows are being done by the private sector, basically through commercial transactions, seemingly harmless transactions that are put together by accountants, auditors and bankers.”

The ICPC chairman, who also commented on attacks on staff of the commission and other anti-corruption agencies by suspects under investigations, said that it was fuelled by impunity and weak laws.

He listed some of the progress made by the commission to include; de-emphasising confession-based investigation, a world-class forensic laboratory, staff auditing and capacity building.

He charged the African Bar Association (AFBA) to play a positive role in regulating lawyers’ effectiveness in the fight against corruption and pledged the commission’s commitment to support the up-coming anti-corruption conference of the AFBA scheduled to hold in Niamey, Republic of Niger.

Earlier in his remarks, the AFBA President, Mr. Hanniba Uwaifo, traced the problem in Africa to corruption which, according to him, has led to the underdevelopment of the continent.

He stressed that the continent cannot grow unless corruption was uprooted, adding that the world is worried about the level of corruption in Africa.

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