The naira is heading back to the level it was before the Central Bank of Nigeria (CBN)’s shock move to stop selling dollars to the Bureau De Change (BDC) operators.
That’s after the currency on Tuesday strengthened to N509 per dollar from N512 on Monday at the parallel market.
Traders say there’s more clarity over the CBN’s new policy to discontinue dollar sales to BDCs and that has seen hoarders begin to sell dollars again after pulling back to digest the shock move last week.
The commercial banks, who the CBN will now channel the $5.7 billion sold to BDCs annually, have started setting up dedicated teller points at all their branches nationwide for eligible foreign exchange needs.
In emails to customers, the banks are vowing to treat foreign exchange requests instantly, subject to required documentation.
Traders said the naira may strengthen further to N504 per dollar as uncertainty about the rate wanes.
On Monday, the naira has steadily pared losses to the dollar after hitting a fresh low following the CBN’s announcement.
The naira had strengthened by 0.58 percent to N512/$ on Monday compared with N515 it closed on Friday, after falling sharply to N525 to the dollar last week after the CBN’s move to discontinue the sale of dollars to BDC operators due to foreign exchange arbitrage.
In the last monetary policy committee (MPC) briefing held on 27 July, the CBN Governor, Godwin Emefiele, announced that the CBN would discontinue the weekly allocation and sales of foreign exchange to BDC operators and would no longer process licenses for new BDCs. The apex bank accused BDC operators of engaging in graft and becoming a conduit for illicit financial flows and money laundering. Subsequently, the CBN will channel weekly allocations of dollar sales to commercial banks to meet legitimate FX requests – personal travel allowance (PTA), business travel allowance (BTA), tuition fees, medical payments, SME transactions, among others – in an attempt to maintain the country’s foreign exchange reserves (currently at US$33.38bn).
According to Coronation Research, the most common reaction is a feeling of déjà vu, given that the CBN had on 11 January 2016 made a similar announcement banning the sale of foreign exchange to BDCs. The apex bank stated at the time that “operators in this segment have not reciprocated the Bank’s gesture to help maintain stability in the market”.
As a result, the naira, which was already under pressure due to the decline in oil prices and the depleting foreign reserves, maintained a steady downward trend in the parallel market – parallel market rates spiked by 3.55 percent following the announcement. In a bid to salvage the dire situation, the CBN reversed its position and resumed the sale of dollars to BDCs in November 2016, 10 months after the ban. Within the period, the naira weakened by 42.1% in the parallel market and the spread between the official and parallel rates widened from 38.1% to 54.0%. The CBN hoped that resuming sales would help to drive down, or at worst stabilize, the parallel rate. Unfortunately, that was not the case, as the rate continued its upward trajectory, peaking at N520/US$1 in February 2017.
Similar to 2016, this time, the initial market response to the ban was a 3.81% decline in naira in the parallel market to N525/US$1. However, since this initial decline, the naira has witnessed two days of successive appreciations.
The Committee of Bank Chief Executive Officers has predicted that the exchange rate to the U.S dollar will continue to recover. The Committed stated that the banking industry is ready to begin foreign exchange sales to customers and that banks are better equipped than BDCs, to meet customers’ forex needs.
“We expect the pressure on the parallel rate to persist, as regular individuals and businesses who do not meet the narrow criteria to access funds through the banks and the I&E window are likely to resort to the parallel market. Consequently, the spread between the I&E rate and the parallel market rate could continue to expand,” analysts at Coronation said.