Ban of forex sales shocks 5000 BDCs, importers
…discontinuation to mount pressure on exchange rate – Analysts at Cordros Research
By Ogaga Ariemu & Olaleye Aanuoluwapo, Abuja
Members of Bureau De Change (BDCs) operators and importers have expressed shock over the ban of forex sales to BDCs by the Central Bank of Nigeria (CBN).
The shock by stakeholders on Tuesday follows the añouncement by the Governor, Central Bank of Nigeria (CBN), Mr. Godwin Emefiele that the the CBN and banks will stop sales of foreign exchange (FX) supply to over 5,000 Bureau De Change (BDC) operators in the country.
The stakeholders afraid of blacklist preferred not to be identified. For instance, one of them said that the ban which took place few days after the opening of a new office with loan raised from banks came as a shock. He noted that the only option left is for him to sack 80 per cent of the staff.
Small and medium enterprises importers said the ban will affect importation by Nigerians who cannot easily access forex from banks.
Also analysts speaking at the end of Monetary Policy Committee (MPC) of the apex bank, expressed mixed reactions over the pronouncement by the CBN governor.
The Central Bank Governor stated that the BDC operators had abandoned the objectives of their establishment, which is to serve the retail end-users who need $5,000 or less.
According to him, they have become wholesale dealers and illegally transact FX to the tune of millions of dollars per transaction.
The Governor noted that the CBN sells about $110.10 million per week to the BDCs (c. 5,500) – $20,000 per BDC, translating to $5.72 billion in a year.
Accordingly, the Governor disclosed that the apex bank would immediately discontinue sales of dollars to the BDC operators, given that they have not fulfilled their obligations of only getting a little margin per FX transaction as agreed.
Given the rent-seeking behaviour of the BDCs, the MPC decided with immediate effect to discontinue the sale of FX to the BDCs and allow the CBN to no longer process or issue new licenses for BDC operations in the country.
The members voted to channel significant portion of weekly allocations of BDC allocations to the commercial banks to meet legitimate FX demands.
They also instructed all commercial banks in the country to create a dedicated teller point in designated branches for the sale of FX for legitimate transactions.
Analysts at Cordros Research Ltd in a statement said discontinuation of sale of foreign exchange to the BDC operators would lead to further pressure on the exchange rate in the parallel market.
According to them, “In the short-term, we expect the new development to lead to further pressure on the exchange rate in the parallel market given the (1) lag between commercial banks settling to adjust to the CBN’s directive and (2) knee jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure.
“Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates.”
The Former president Chartered Institute of Bankers of Nigeria, President, Prof. Segun Ajibola in a chat with Nigerian NewsDirect said, “The concept of BDC is a good one but the operation in Nigeria has left a bitter taste in the mouth.
“BDCs are expected to mobilize foreign exchange from mostly informal sources and sell to retail end users to meet their needs (school fees, medical, SMEs, households, etc).
“But in Nigeria, the allocation of FX to BDCs enabled the owners to have easy access to economic rent (receiving income for doing nothing).
“Besides, sharp practices in the form of round tripping, wholesale dealings, etc have dotted the landscape.
“The stoppage of sale of foreign exchange to BDCs by Central Bank is proper. Let them study and emulate the BDC template of other countries. They source their funds and sell to retail and micro users, subject to minimal documentation.”
Speaking from a different perspective, Economist & Former DG LCCI, Dr Muda Yusuf, said, “What is happening in the foreign exchange market is a consequence of the CBN policy choice of a fixed exchange rate regime and administrative allocation of FX.
“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. Of course market failures are recognised in economics, and these are exceptions that can be identified in dealt with.
“Suppressing the market is like swimming against the tide. It is a difficult battle to win.
“Moving retail FX transactions from BDCs to the banks is like kicking the can down the road. The same issues would manifest even with the banks.
“Managing a subsidy regime is typically a herculean task. We have seen this happen with fertiliser subsidy and petrol subsidy. The story cannot be different with foreign exchange.
“The way out of this foreign exchange conundrum is for the CBN to allow the market to function. It is also imperative for the apex bank to de-emphasize demand management and focus on strategies to stimulate FX inflows.
“A fixed exchange rate regime is a major disincentive to inflows and and creates enormous pressure of demand for FX. It is a contradiction in terms.
“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 FX supply and boost underground economy.”
