The foreign exchange (FX) market and stakeholders were thrown into shock as the Central Bank of Nigeria (CBN) on Tuesday discontinued the sale of FX to Bureau De Change (BDC) operators, a development that may see the naira hit a new low against the dollar.
Godwin Emefiele, governor, CBN, announced this after the two-day Monetary Policy Committee (MPC) meeting in Abuja, where the MPC retained the benchmark interest rate at 11.5 percent. The naira depreciated in the black market to N505 per dollar Tuesday from N504 per dollar Monday, as early signs of hoarding emerged.
Emefiele accused the BDCs of trading FX in wholesale quantities, which amounts to selling more than $5,000, in contravention of Nigeria’s FX regulations.
The decision will end the sale of $5.28 billion annually by the central bank to the nation’s bureau de change, a key source of FX for Nigerians travelling abroad and local businesses.
The central bank will also stop issuing new licences to FX retail trading firms whose number more than doubled to almost 5,500 over the past five years, according to Emefiele.
“I am a bit disturbed about the administrative measures that are taken to actually control the market,” said Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited.
Read also: Here are market reactions as CBN halts dollar sales to BDCs
“Once supply is reduced either because the quantity supplied is reducing or because the channels for putting them into the market have reduced, the price of that currency may depreciate because of the illegality that surrounds it. Administrative measures have never been known to work in terms of markets,” Rewane said.
To fill the void that would be left behind by the BDCs, Emefiele said commercial banks will now establish retail tellers to take on their functions.
“I fear asking everybody to go to a designated teller at a bank to buy FX for the smallest of transactions will lead to a depreciation or speculation against the naira,” Rewane stated.
The banks must make every effort to meet genuine demand as soon as possible, as the CBN seeks to reign in speculative demand for FX and take on the challenge of meeting all genuine demand, Emefiele said.
Reacting to the development, Razia Khan, managing director/chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said the CBN hoped to see wholesale FX transactions go back to the Investors and Exporters (I&E) forex window.
“While the pledge of reforms is encouraging with more FX supply to the I&E window and the likelihood that we do eventually see more adjustment to the I&E FX rate, the challenge in the interim will be to stop the emergence of a new parallel market,” Khan said.
Unless the supply of FX improves meaningfully, this is likely to remain a risk, she noted.
However, a meaningful improvement of FX supply to the I&E window would be the best hope of halting parallel market trading for larger transactions, she said, adding that much will depend on the extent to which the authorities are also willing to tolerate price discovery on the I&E window.
This is not the first time that the CBN is halting sales of dollars to BDCs.
In January 2016, the CBN discontinued the sale of FX to the BDCs because they were using up the country’s foreign reserves for illegal transactions and selling the dollar at N250 compared with the official rate of N197. The naira weakened to N282 per dollar later the same day.
This time, the CBN is also accusing the BDCs of making efforts to dollarise the Nigerian economy as it receives about 5,000 applications every month for BDC licences.
The BDCs have turned themselves away from their objectives and have now become agents that facilitate graft and corruption in the country, Emefiele said.
“We cannot continue with the bad practices that are happening at the BDC market,” he said. The CBN governor was worried that several international organisations, embassies patronise BDC through illegal forex dealers to fund their institutions.
“We will deal ruthlessly with Nigerian banks that deal with illegal BDCs and we will report foreign organisations patronising them,” he said.
More analysts’ reactions
Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said: “We expect to see a major knee jerk reaction at the parallel market until we begin to see improvement in FX liquidity. There are several items that have been excluded from the CBN list like Eurobond. This will trigger a major spike in the exchange rate for inflow dollars.”
Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, said: “The decision by the CBN to stop forex sales to BDCs has merits and demerits.”
Having said that, I think it is in the best interest of the Nigerian economy.
“On the positive side, it 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.
“It 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.
“Furthermore, 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 be reduced.
“On the flip side, this measure will wipe out the employment opportunities created in the sector with over 5,000 BDCs with several others waiting to be licensed.
“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,” Uwaleke said.
Ayorinde Akinloye, an analyst at United Capital plc, said: “The decision by the CBN to halt the sale of dollars to BDC will impact the supply of dollars in the parallel market. And that will cause increased speculation, which could further depreciate the naira in the parallel market. So, it will widen the spread between the official rate and parallel market rate. And also, it could trigger inflationary pressures.”
Emmanuel Odiaka, CEO, ECOB Capital, said: “It was long overdue and a bombshell, but the question will remain in the market is, how much supply is CBN ready to pump into commercial banks to meet the legitimate needs. That will depend on if this new MPC tool will have any effect in the market.”
