Naira falls to 905/$ on renewed pressure at parallel market

The naira extended its fall on Thursday, exchanging at 905 to a dollar at the parallel segment of the foreign exchange market.

The latest dip by the local currency against the greenback comes amid renewed demand pressure, despite the announcement of an operational mechanism for Bureau De Change (BDC) operations by the Central Bank of Nigeria (CBN).

FX dealers in the parallel market were buying dollars at N895 and selling at N905, according to data by AbokiFX, an online platform that tracks the exchange rate. Before now, the naira had at the parallel market remained flat at 900/$ while it dipped to N773.42/$ at the Investors & Exporters window.

“In the bonds space, investors remain bearish notably at the mid-long ends of the market, due to rising uncertainties over the country’s precarious FX situation as well as the recent pause in fiscal reform direction,” said Lagos-based Vetiva analysts in their August 21 fixed income report. “It appears that the temporary reprieve the naira saw following the announcement of the $3 billion Afreximbank loan is starting to dissipate.”

The CBN said recently that the spread on buying and selling by BDC operators would be within an allowable limit of -2.5 percent to +2.5 percent of the foreign exchange market window weighted average rate of the previous day.

“In my view, there is a need for a major policy shift on the activities of the BDC operators beyond just mandating them to buy and sell within the -2.5 percent and +2.5 percent price margin,” an informed market analyst told BusinessDay. “First, in the past 6-8 years, there was frivolous issuance of BDC licences, and I believe the CBN must rise up to the occasion to clean up what I consider to be a probable error on its part.”

“I have not seen anywhere in the world where BDCs or money services businesses are as many as we have in Nigeria. It was like a racketing of subsidy, especially, as the CBN was selling FX to the operators at artificially subdued official rate while the BDCs were selling to the market at ‘unholy’ spreads, well outside of the guidance of the CBN,” he added.

The analyst expressed doubt over the ability of the CBN to monitor the activities of the BDCs, given the number of operators.

He said: “BDCs were very relevant when we had less bank branches and relatively weak payment systems. It’s interesting today that most of the BDC operators are clustered around bank branches; so it means banks can effectively serve that role.

“More so, if we must have as many BDC operators, why not make them agents of banks, as I believe that may help the CBN to better coordinate their activities. In addition, there should be restrictions on BDC operation of cash services to ensure effective KYC and reporting.”

In addition to CBN guidelines for spread on buying and selling by BDC operators, the apex bank also asked for mandatory rendition of statutory period reports on the Financial Institution Foreign Rendition System, which it said had been upgraded to meet individual operator’s requirements. It also said that BDCs’ non-rendition of returns would attract sanction, which may include withdrawal of operating licence.

Another analyst who spoke on condition of anonymity said: “Whoever buys from BDCs or sells to them should get electronic credit/debit and if such person needs cash, they can access the FX cash at the bank, where proper reporting and KYC can be done.

“Again, this new circular has not indicated expected source of supplies to BDCs and I can only hope that CBN is not planning to reinitiate direct sales of FX to the BDCs, as that may possibly just set back the progress.”

He expects the CBN to integrate BDCs into the formal window by allowing them to bid for FX at the official market through their banks, with hope they would sell whatever they buy from the market within 48 hours or resell it back to the official market.

“I believe this should be considered, in addition to organising the BDCs for a more effective coordination and better role in the financial system. This would help monitor their activities and weed out speculators and those with rent seeking interest,” he added.

Earlier this week, Lagos-based United Capital analysts said they expected continued pressure on the naira across all market segments, “given that FX pressures will persist as dollar earnings remain weak”.

“However, we expect to see the appreciation of the naira continue as the CBN continues to implement its recent FX policies,” they added.