In rare courage, CBN weakens BDC operations, stops FX funding

The Central Bank of Nigeria (CBN), in rare courage, yesterday, ended foreign exchange (FX) supply to bureau de change (BDC) operators and registration of new players with immediate effect.

Governor of the CBN, Godwin Emefiele, in a media briefing on the outcome of the Monetary Policy Committee (MPC) meeting, accused BDC operators of rent-seeking behaviour and involvement in money laundering activities, adding that the authority receives about 5,000 fresh applications monthly.

The MPC retained the Monetary Policy Rate at 11.5 per cent and also retained the Cash Reserve Ratio and Liquidity Ratio at 27.5 per cent and 30 per cent respectively.

Speaking on the decision to stop forex sales to the BDCs, Emefiele said the MPC noted with disappointment and great concerns that the BDCs, which is to serve the retail end-users who needed 5,000 dollars or less, had defeated their purpose of existence to provide forex to a retail user, but instead, had become wholesale and illegal dealers.

Emefiele said they had become wholesale dealers and illegally transacted FX to the tune of millions of dollars per transaction. The BDCs, he observed, had continued to make huge profits while Nigerians suffered in pain. He said the commercial banks would be monitored to provide forex for the legitimate use of Nigerians.

The CBN weekly supply is the major rationale for the existence of BDC operators, many of whom have been accused of carrying out speculative activities. Hence, yesterday’s action is being interpreted as the beginning of the end of the reign of the currency traders, if sustained.

But economists have balked at CBN’s ability to hold its ground against the political class, who are often linked to the ownership of the business. Dr. Bongo Adi, a researcher and economist at Lagos Business School, admitted that the announcement was a demonstration of rare courage.

He told The Guardian his fears, that pressure ahead in the coming days could force the monetary authority into capitulation.

This was also the view of Mrs Margaret Ogundana, retired CBN Deputy Director, who noted that the ban would put more pressure on the naira. “Banks don’t have dollars to give out to their customers on demand. With this new development, getting dollars would be more difficult than what we have now,” she said.

Bongo, who traced the origin of BDC in Nigeria to the first coming of President Muhammadu Buhari, described the system as a baby of the country’s political oligarchy, noting that those who benefit from the windfall will stop at nothing to force the CBN into a volte-face.

The parallel market clusters in Lagos and Abuja were tense yesterday, as the news broke. Operators who spoke said the decision remained a rumour until a circular is issued. The Guardian was informed that national executives of the Association of Bureau de Change of Nigeria (ABCON), who were in a panic mode, entered into a long meeting to assess the implication of the new policy.

President of the association, Dr. Aminu Gwabade, did not respond to inquiries on the position of the body towards the regulatory move. Previously, he had insisted operators are agents of economic growth and will cooperate with the CBN to institute sanity in the FX market.

Announcing the ban, Emefiele came hard on the operators, saying: “We are concerned that BDCs have allowed themselves to be used for graft.”

He also raised the concern that traders are, by their actions, dollarising the economy.

“They have turned themselves away from their objectives. They are now agents that facilitate graft and corruption in the country. We cannot continue with the bad practices that are happening at the BDC market,” Emefiele insisted.

He noted that several international organisations, including embassies “patronise BDCs through illegal forex dealers to fund their institutions.” He warned that the CBN would “deal ruthlessly with Nigerian banks that deal with illegal BDCs.”

Analysts at Cordros Research Ltd. said the discontinuation would lead to further pressure on the exchange rate in the parallel market, as the commercial banks settle to adjust to the CBN directive.

The analysts added that knee-jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure was another factor.

“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,” they said.

Uche Uwaleke, a professor of capital market at the Nasarawa State University, described the CBN’s action as bold and timely. He said the decision was expected and well justified. “The decision to stop forex sale to BDCs has its merits and demerits. I think it is in the best interest of the Nigerian economy.“On the positive side, it is consistent with the move by the CBN to unify exchange rates and bring more transparency to the forex market. Exchange rate unification is in line with the International Monetary Fund (IMF) and the World Bank’s recommendations to improve the country’s profile and credit standing. It signifies that the country is serious in its reform efforts.

“It will slow down the rate of depletion in external reserves. The move is likely to check the round-tripping of forex but will reduce the supply of forex in the parallel market. Speculative demand for forex is also likely to reduce,” he said.

The professor, however, said the move would increase the rate of unemployment as over 5,000 licensed operators and their employees could be thrown into the labour market.

Uwaleke continued: “Also, the gap between the Nigerian Autonomous Foreign Exchange (NAFEX) and parallel market rates is likely to widen further with dollar shortages in the parallel market. So, the CBN should ensure that FX purchase via banks is made stress-free with minimal documentation. This is what pushes people to the parallel market.”

The restriction of the BDC operator is just one of the series of regulations the CBN has embarked on. It had earlier replaced the highly discounted CBN official rate with the NAFEX window, a fairly liberal segment in which its exchange rate unification programme is anchored. The stoppage of FX sale to BDC operators may have taken the programme a step further as the country battles its currency crisis.

The naira has faced intense pressure as demand for foreign currencies outweighs supply. The apex bank a few months ago extended indefinitely the naira-for-dollar commission, which seeks to encourage Nigerians in the diaspora to wire FX through the official window.

As FX supply dries up, the external reserve dropped less than $33 billion recently, the lowest in the past year, before a gradual accretion that pushed it up a little above N33 billion on Monday. The gross component was N33.3 billion while the liquid form was N33.05 billion. There is fear that the size of the external reserve can barely cover the value of the country’s six-month import, which is increasing at a fast rate.

In the meantime, the MPR, which expressed concern about the state of the economy, retained the monetary policy rate (MPR) at 11.5 per cent with an asymmetric corridor of +100/-700 basis points. The cash reserve ratio (CRR) and liquidity ratio (LR) were also left unchanged, at 27.5 per cent and 30 per cent respectively.

The three parameters determine the commercial interest rates and the amount of funds available to banks to lend.

On tightening, MPC feels that whereas this will limit excess liquidity available to attack the foreign exchange market, it nevertheless feels that tightening will reduce the money supply and thus, inhibits the ability of Deposit Money Banks (DMBs) to create credit that is needed to stimulate manufacturing output, which could also help to moderate prices,” it noted.

MEANWHILE, Nigeria plans to launch its own cryptocurrency, called the “e-naira”, in October, the CBN governor disclosed yesterday. Nigeria barred banks and financial institutions from dealing in or facilitating transactions in cryptocurrencies in February.

CBN Governor, Emefiele said the “e-naira” would operate as a wallet against which customers can hold existing funds in their bank account.