CBN’s new policies shakes FX market

Nigeria to pay foreign debts before other obligations

The recent Central Bank of Nigeria (CBN) ban on the sale of foreign exchange to the Bureau de Change Operators (BDCs) in the country may have extended the possibility of an end to the myriad of problems facing the nation’s foreign exchange market.

Following the CBN’s ban, the Naira fell significantly against the Dollar on Wednesday, it however appreciated to N520 to a dollar on the parallel market on Thursday. This came on the heels of Chief Executive Officers (CEOs) of banks promising to support the new foreign exchange (FX) measures of the apex bank and the regulator’s effort to achieve foreign exchange stability.

The dollar which opened the day’s trading session at N505 per $1, closed at N522 to a dollar at the parallel market segment, according to data obtained from abokimallamfx.com.

This implies a N17.00 or 3.40 per cent devaluation from N505.00, the rate it closed at the previous session of the black market on Tuesday, and the currency’s biggest fall ever.

Godwin Emefiele, the CBN Governor while announcing the ban on sale of forex, said the BDCs had defeated their purpose of existence to provide forex to retail user, but instead, they had become wholesale and illegal dealers.

According to him, “Operators in the BDC have not reciprocated the gesture to help maintain price stability in the market since the CBN had been selling forex to them.

“They have remained renegade and so greedy, recalcitrant with abnormally high profit from these sales while ordinary Nigerians have been left to feel the pain and therefore suffer.

“Given this rent seeking behaviour, it is not surprising that since the CBN began to sell forex to the BDCs, the number of operators has risen from mere 74 in 2005 to over 2,700 in 2016, and almost 5,500 BDCs as at today.

“In addition, the CBN constantly receives nothing less than 500 new applications from BDC licences every month, and we therefore begin to wonder, what is in this business that everybody must be in it?”

“The Central Bank will henceforth discontinue the sale of forex to Bureau de Change operators”.

The CBN had been supplying each licensed BDCs $10,000 twice per week at the rate of N393 with the instruction that they should sell with a margin of N2.

Chairman, Body of Bank CEOs and CEO of Access Bank Plc Herbert Wigwe, on Thursday during a virtual media briefing said the banks were ready to meet the mandate of the CBN, adding that they have more than enough capacity to deliver. He explained that the process would be centralised to avoid abuse and would start immediately following a meeting with the CBN.

“The banking industry is willing and ready to carry out this function. As you are aware, the bank has very strict compliance measures in terms of Know Your Customer (KYC). For us at Access Bank, we will ensure that all our branches meet the requirements.

“If you look at all the banks, you would agree with me that the banks have more than enough capacity to deal with the mandate of the CBN. “If we see non-compliance issues, we will report to the CBN and the law enforcement agencies. So if people intend to do things, such as coming with a second passport and other things, we will report them to the law enforcement agencies.”

“We feel that what the CBN has done is worthy of commendation because people will have access to different channels to collect their BTAs and school fees required for their children.

“The banks have a lot more channels to assist the customers get access to forex, depending on where they are, even if they are in Enugu or Port Harcourt.”

However, Dr Muda Yusuf, an economist and former Director-General, Lagos Chamber of Commerce and Industry, said what was happening in the foreign exchange market was a consequence of the CBN’s policy choice of a fixed exchange rate regime and administrative allocation of forex.

According to Yusuf, “It is a policy regime that has created a huge enterprise around foreign exchange – round tripping, speculation, over invoicing, capital flight etc.

“The action of the apex bank amounts to tackling the symptoms rather than dealing with the causative factors, which is not a sustainable solution.

“It is regrettable that the CBN does not believe in the market mechanism. Yet market systems are time tested as instruments of efficient resource allocation in leading economies around the world.”

“Moving retail forex transactions from BDCs to the banks was like kicking the can down the road. The same issues would manifest even with the banks.”

He said, the way out of the foreign exchange conundrum was for the CBN to allow the market to function.

“The CBN needs to give the market a chance. Its current approach would continue to deepen distortions in the economy, perpetuate round tripping, fuel speculation, suppress forex supply and boost underground economy.”

Author: Greg