Nigeria’s growing FX cartel under CBN’s watch

Musa, a Bureau De Change(BDC) operator, bailed out his elder brother after operatives of the Economic and Financial Crimes Commission(EFCC) raided a popular BDC hub in Wuse Zone 4, Abuja.

He says BDC’s are filling the foreign exchange demand of citizens which CBN has failed to process fast enough.

“EFCC said we are operating illegally but we have our licence. CBN doesn’t give businesses FX exactly when the business people need it. We are the ones giving them,” Musa said.

He reiterated that regular citizens and business owners would come to them for FX which they were able to get on the spot as against the unending wait after filling documentations such as Form A for invisible transactions (PTA/BTA,medicals, education and other remittances) and Form M (form to be filled for FX payment in visible trades) through deposit money banks.

In November 2022, naira fell to an all time low of N800/$1 following CBNs announcement of the naira redesign, and a surge in dollar demand, thereby widening the parallel market margin when compared to the official rate. This led to EFCC’s arrest of some BDC operators and currency speculators in the parallel market.

Following the arrests, Director of Operations at the Economic and Financial Crimes Commission, Abdulkarim Chukkol said the Commission considers foreign exchange malpractice as an economic crime against the Nigerian state.

Why are more Nigerians turning to BDC’s for FX?

Mr Emeka who constantly receives diaspora remittances said he preferred changing his FX with BDCs as banks would shortchange him especially with the wide premium in the black market, “I received a total of $47,950 in 2022. I can’t change my FX with the bank. I get better deals with my BDC operator, although my transactions are never documented by the BDC like in the bank. CBN should have a single and stable exchange rate.”

Mr Rajit, a foreign investor and manufacturer in Nigeria said he gets the majority of his FX for his business from the black market which has such a ridiculous impact on the company profit.

“I get 90% of my FX for business from the black market and the other 10% from CBN. For example, I fill form M requests of $1million and my company is allocated only $10,000. What do you want me to do with it? I need the business to keep running and as such, I go to the BDCs and get FX at black market rate,” he said.

While CBN claimed to have provision for certain FX requests, the assumed beneficiaries claim it is a herculean task assessing FX from CBN through deposit money banks and are forced to buy FX at the black market rate. Some claim there is round tripping and an unascertained level of racketeering, especially with the multiple exchange window permitted by the CBN.

How BDC’s Ballooned out of control under the CBN’s watch

Originally, BDC’s were to serve retail end users who needed $5,000 or less. According to CBN, Bureaux de Change were licensed in 1989 to allow access to “small users of foreign exchange” and to deepen the officially recognized FX market of which exchange rates in the Bureaux de Change will be market driven.

The CBN once even stated that scarcity in the official sector and prevailing bureaucratic procedures necessitated the growth and development of the parallel market. In 2005 there were just 74 BDC licensed by the CBN and this number continued to grow exponentially as parallel market margins widened.

Fast forward to February 26, 2009, when CBN restructured BDCs into categories A and B in order to liberalise the FX market, enhance its allocative efficiency, and facilitate end-user access to foreign exchange supply. It was expected to promote efficiency of small and medium-scale enterprises. This initiative was short-lived as it became a channel for rent seeking and racketeering.

By November 8, 2010 CBN withdrew the licence of all existing Class’A’ BDCs. Apparently, the target end-users had been sidelined while large transactions that should have been channelled through the banking system were carried out through Class ‘A’ BDCs.

Could this have been the perfect time to expunge and revoke the licence of BDC’s?

Worthy of note is that prior to 27th of July 2021 when CBN commenced the refund for BDC licensing fees, Nigeria was the only country in the world where the Central Bank sold dollars directly to BDC’s.

This move by the CBN only made the BDCs totally unaccountable, as they were no longer obliged to report transactional operations of total FX sales, FX sourcing and to whom they were sold to thereby giving room for FX malpractice and Illicit financial flows .

It may be argued that the BDC’s were aided by the CBN for so long even as they saw the threat it posed to the country’s economy. While BDC’s may not be the singular cause of the pressure on the naira, experts consider the multiple exchange rate regime allowed by the CBN, one of the major challenges keeping local and foreign investments at arms length from the country.

Should the CBN maintain its stance on parallel market rates and How can we grow Nigeria’s fragile economy?

The Former DG of the Securities and Exchange Commission and Former treasurer of World Bank, Arunma Oteh, opted for a unified exchange rate as the most transparent option.
“My take is that a unified exchange rate is more transparent, fairer and more equitable. It prevents corruption, and rent seeking” she said.

The DG added that she suspects the objectives of the CBN to include support to manufacturing and other productive sectors. “Sadly, it is difficult to implement in Nigeria,” she said.

Dr Innocent Chukwuma, CEO of Nigerians First Indigenous Car Manufacturing Company Innoson Vehicles Manufacturing said the solution to the FX crises is export.

“Export! That is one solution. I do not depend on anybody to supply me foreign exchange needed to run my business anymore.To get FX to purchase the raw materials I need for my business, I produce goods and supply outside the country and then I’m paid in dollars.”

A former bank CEO who pleaded anonymity, said the illegality occuring with the CBN’s insistence on an official rate is an open secret. “There is a challenge when we dolarise the Nigerian economy. Naira is our legal tender not dollars. There is really no need to have domiciliary accounts as we have in Nigeria.”

He argued that anybody that sends dollars to Nigeria should be bought over by CBN and the bank should credit your account with the naira.

The CEO also pushed for a stop to the operation of BDC’s. In his opinion, “the emergence of mastercard, visa card and the likes, should have stopped the business of BDCs. I would suggest that the CBN allows the Naira to become freely convertible which would lead to the official devaluation of the currency in the near term, he said.

The International Monetary Fund had advised Nigeria to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.

Read also: How forex impacts trade in Nigeria

They recommended that: “In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.”

Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC stressed on the FX issues saddling the demand side of the market. “We need to make the official market the only market. I would advise that there is transparency, there should be a handshake between the fiscal policy and monetary policy and finally harmonise and bring all legitimate FX demand to the official market, while using CBN intervention of buying and selling to moderate the market rate. This would also curb round tripping.”

Aminu Gwandabe, President of the Association of Bureau De Change Operators of Nigeria, reiterated his stance on the existing multiple exchange rate. He said that having two exchange rate systems sends the wrong signal to investors.

“You cannot have both a floating exchange rate and a hard exchange rate at the same time. It sends wrong signals to investors and allows for round tripping, which allows some people to make so much profit doing nothing. This policy has not worked and the fact that the CBN still continues with it is unfathomable.”

In his opinion, there is a need for collaboration between the BDCs and the CBN in the implementation of market-friendly policies that would make the BDCs’ impact more positive on the market, and promote exchange rate stability in the economy. The dual exchange regime has been an avenue for profit-making and has not met the objectives of the CBN. It should be scrapped.