Analysts welcome CBN’s review of FX market rules

Financial analysts and bankers last night commended the Central Bank of Nigeria (CBN) for lifting the ban on Foreign Exchange (FX) cash deposits and discontinuation of Foreign Exchange supplies to the Bureau De Change operators.

Some analysts said last night that the bold step is capable of restoring sanity to the market which has been characterised by volatility and wider margins between the official and parallel markets.

Consequently, they are hopeful that the development will make banks to begin to fund Letters of Credit (LCs) which they had abandoned as a result of the dearth of foreign exchange. But some other analysts said last night that it however depends on the liberalisation of the interbank so as to meet customers demands.

“It’s a step in the right direction”, Ladi Balogun, Group Managing Director/Chief Executive Officer, FCMB, said in an emailed response to BusinessDay.

Razia Khan, Managing Director, Chief Economist, Africa Global Research, Standard Chartered Bank, London, said the moves which allow commercial banks to accept USD deposits, as well as the discontinuation of USD sales to BDCs are both encouraging.

“Both hint at the eventual normalisation of FX market conditions, perhaps with a move back to a more liberalised FX regime in which banks are able to trade FX, and – perhaps within some parameters – the NGN can find a market-determined level”, she said in an emailed response to BusinessDay.

Ayodeji Ebo, head, investment research, Afrinvest Securities limited, said, “In our opinion, the ban of sales of forex to the BDCs will only yield positive results if the interbank market will be liberalised. This means the CBN will be ready to meet customers demands and allow customers to access forex through the interbank market. This means a review of the banned items should be revised if not the pressure at the parallel market/unofficial market will compound this problem, increasing the spread between the interbank market and parallel market and further create round tripping incentives.

The CBN had  on Monday lifted the ban on Foreign Exchange (FX) cash deposits, just as it  announced that it is discontinuing Foreign Exchange supplies to the Bureau De Change, calling them the conduit pipe draining the nation’s almost depleted reserves and money laundering agents.”

Godwin Emefiele, CBN governor,  announcing the new policy, said the earlier concerns for the FX cash restrictions, especially the dollarisation of the economy, are almost tackled and that there would be need to increase supply to the system.

Emefiele said the BDCS were in total violation of FX rules, as the CBN noted with grave concern that the operators have abandoned the original objective of their establishment, which was to serve retail end users who need US$5,000 or less.

Instead, they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction and thereafter use fake documentations like passport numbers, BVNs, boarding passes, and flight tickets to render weekly returns to the CBN, Emefiele noted.

He said the CBN is only left with the option of withdrawing its funding since it is finding it obviously difficult to effectively oversee the activities of the over 2,768 BDCs operating in Nigeria today.

“The Bank (CBN) would henceforth discontinue its sales of foreign exchange to BDCs. Operators in this segment of the market would now need to get their foreign exchange from autonomous sources. They must however note that the CBN would deploy more resources to monitoring these sources, to ensure that no operator is in violation of our anti-money laundering laws,” he told a press conference.

“The Bank would now permit commercial banks in the country  to begin accepting cash deposits of foreign exchange from their customers.”

Briefing journalists on the issue in Abuja,  Emefiele noted that the said the drop in crude prices from a peak of US114 barrel in July 2014 to as low as US$33/barrel in January 2016, has put the country’s reserves under intense pressure from speculative attacks, round tripping and front loading activities by actors in the FX market.

This fall in oil prices also implies that the CBN’s monthly foreign earnings have fallen from as high as US$3.2 billion to current levels of as low as US$1 billion. Yet, the demand for foreign exchange by mostly domestic importers has risen significantly.

“For example, the last we had oil prices at about US$50 per barrel for an extended period of time was in 2005. At that time, our average import bill was N148.3 billion per month. In stark contrast, our average import bill for the first nine months of 2015 is N917.6 billion per month, even though oil prices are now less than US$35 per barrel,” Emefiele stated

“The net effect of these combined forces unfortunately is the depletion of our foreign exchange reserves. As of June 2014, the stock of Foreign Exchange Reserves stood at about US$37.3 billion but has declined to around US$28.0 billion as of today.”

Emefiele said it was necessary to take these tough decisions because the fast depleting reserves also meant that the apex bank had had to take a number of countervailing actions, including the prioritisation of FX allocation to first fund Matured Letters of Credit from Commercial Banks; Importation of Petroleum Products, critical Raw Materials, Plants, and Equipment, and then Payments for School Fees, BTA, PTA, and related expenses.

Nigeria is the only country in the world where the Central Bank sells dollars directly to BDCs, and the apex bank is concerned that the operators in this segment have not reciprocated the bank’s gesture to help maintain stability in the market.

“Whereas the Bank has continued to sell US Dollars at about N197 per dollar to these operators, they have in turn become greedy in their sales to ordinary Nigerians, with selling rates of as high as N250 per dollar. Given this rent-seeking behaviour, it is not surprising that since the CBN began to sell foreign exchange to BDCs, the number of operators have risen from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licenses every month.

The governor stressed that rather than help to achieve the laudable objectives for which they were licensed, the CBN has seen Avalanche of rent-seeking operators only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates; as well as Potential financing of unauthorized transactions with foreign exchange procured from the CBN.

Onyinye Nwachukwu &  Hope Moses-Ashike