CBN sets in motion for single exchange rate

CBN Headquarters

.BDCs FX ban may spike Naira devaluation, inflation, say experts

. ‘Reversal of decision imminent’  

Clara Nwachukwu

Central Bank of Nigeria (CBN’s) decision, yesterday, to exclude Bureau De Change (BDC) operators from the foreign currency (FX) market may have set in motion a long-sought single exchange rate system, which international financiers have continued to harp on to strengthen the funds market.

However, many believe this is a decision that may be reversed soon, because of the negative consequences it will likely bring about in the economy and on Nigerians, since the CBN had gone that route before and ended up reversing itself.

CBN Governor, Mr Godwin Emefiele, in taking the decision, had accused the parallel market operators of becoming an outlet for illicit FX flows and graft, “We are concerned that BDCs have allowed themselves to be used for graft.”

Consequently, the CBN also declared that it will no longer process applications for BDC licences in Nigeria, in addition to halting applications no matter their level in the process, and will henceforth channel the weekly sale of $110million hitherto sold to BDCs through the commercial banks.

The decision, which is seen as a further squeeze in the market sent a huge shock to the FX market even as the Monetary Policy Committee (MPC), at the end of its meeting, Tuesday, had agreed that the current situation, neither gives room for tightening, as this will hurt output growth, nor loosening, as this will exacerbate inflationary pressures.

A communiqué issued, reads in part: “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 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.”

Expectedly, the MPC had also left existing rates unchanged, both the benchmark for the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR), the asymmetric corridor, and liquidity ratio and a host of others.  

Winners and losers

While the decision has been applauded by some experts, who spoke with Sustainable Economy, saying it is the only way to streamline and bring about sanity in the FX market, others believe the consequences may herald further shocks in the economy in the short term through further devaluation of the Naira and spike in current inflation levels.

As at this morning, the Naira officially exchanges for N410.16/$ as posted on the CBN website, while at the parallel market, it sells for N500/$.

Experts believe such a wide gap is the main reason the CBN decided to cut off the BDC. “They get FX at N408 and less and they go out and sell at parallel market rate instead of the official rate, and there was so much inefficiencies that there was a need to ban it.”

Also, this huge margin is the avenue allegedly being used by the BDCs to indulge in graft. “What was discovered was that the operators use the money given to them, change them and use it to either bribe or to do some other illegal activities. Now, official money will no longer go for such activities but will go into a more productive and transparent market.”  

Besides, they noted: “We are the only country in the world that allocates foreign exchange to the Bureaux; in other climes all that they do is to buy autonomously, which is why they are at the airports of all countries for you to buy and sell, and they make their own margin.”

Among the winners is the economy under a single rate system, as well as those companies that have done backward integration before now, who will benefit from this move because they are less dependent on imported raw materials, and won’t reflect on their future earnings.

Economist and former Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, notes that “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 forex. It is a policy regime that has created a huge enterprise around foreign exchange – round tripping, speculation, over invoicing, capital flight etc.”

This is just as Research Analysts, Ambrose Omordion, agrees that “It is a positive development for the capital market, and will be good for the market and the economy, because CBN before now has been struggling to have a single exchange rate.”

As a result, he notes that “the import and export (I&E) window, will become easier to manage the Naira, which will cause better stability if the CBN truly supplies the BDC volume to the banks, because the BDC market has been a source of worry for the CBN, and although it was pained to take the decision, it had to do it to boost the economy in the future.”

At the end of the day, the banks, which had earlier been given a clean bill of being healthy and stable, amplified by the MPC’s applaud of “the continued resilience of the banking system in the face of severe shocks to both the domestic and global economies,” will receive further boosting. This is expected to translate into bigger balance sheets through more profits and higher liquidity levels at the end of the year.

Among the final winners are the BDCs themselves, as the serious operators will now be separated from those whose unethical activities necessitated the CBN ban.    

However, the BDCs, who told Sustainable Economy that they will abide by the CBN’s decision, are equally among the biggest losers, as their numbers had grown from about 74 operators in 2000 to a whopping 5,000 in 2021. Consequently, the number of operators will shrink without the official FX largesse.

Analysing the immediate consequences of the CBN ban of BDCs from the FX market, the Deputy Managing Director, Afrivest (West Africa) Ltd. Mr Victor Udukauba, agrees that the Naira will suffer further devaluation in the parallel market. “In the short term, that is what will happen. Lack of liquidity clearly means less supply and if demand is still where it is then prices will go up and that’s the reality.”

“By squeezing out supply to that segment, clearly liquidity to the black market would shrink and that could obviously further worsen the pressure that is being experienced on pricing,” he adds.

But he argues that this can also be avoided “Unless there is a way for the CBN to infuse that liquidity through the banks into the system directly; I don’t see how anything will change, and that also is left to be seen.”

For the Managing Director of APT Securities & Funds Ltd., Mr Kasimu Kurfi, the dollar may rise to as high as N700/$, “because Mallam (BDC) must trade dollars. If there is scarcity, he will increase the price, and when this happens, people will still not go to the banks, and before you know it, exchange will no longer be at N500 but at N600 or N700/$.”     

Furthermore, once this happens Kurfi says inflation will spike further thereby weakening the capital market operations due to falling disposable income, saying: “Definitely it will affect the market and the economy. When you look at the inflation that is coming down, from next month the exchange rate will rise and so will the inflation rate, because they go hand in hand.”

As a result, the Managing Director/CEO, Financial Derivatives Company Ltd., Mr Bismarck Rewane, during the Channels network news, agreed that “Definitely some will suffer, but the ultimate solution is to encourage people to go to the banks.”

But he also thinks CBN can “sell to the BDCs at the parallel market rate, less 5% i.e. if the market is N500 sell to the BDCs at N490; the N10 margin is so much lower than the previous N100 margin. CBN was spending $100million/week; $440million/month; and $5billion/year for travels. When there were COVID restrictions, by the time you paid for your COVID tests here and paid there, by the time you came back the cost was unbearable, so it was not sustainable.”

Both Ndukauba and Rewane argued that those who do not have the patience to go through the hassle of bank documentation to get their FX, would have to pay a premium to get it from the parallel/black market.

Ndukauba notes: “If you channel all of that demand through the banks, the question is: how do you even address it anyway, because the fact is a lot of the need for dollars that has been outside the banking system would now be unaddressed or unsorted? What have been provided through the banks is a formal channel; it is either you are buying dollars to pay for medical bills or foreign education and you have to go through the Form A approach; if you are buying dollars for travel – BTA, PTA, again, there are limits, and even that requires documentation.

“A lot of people who deal in the parallel or black market, typically either do not have patience for such documentation, or would rather just pay the premium and get it and move on than going into a system where you are not even sure of whether you are going to get what you are putting it for.”

Agreeing, Rewane says: “It’s easier to put 50 flies in a bottle than going into a bank and coming out in five minutes, and anything that is cumbersome and inconvenient will push people further away from the system.” But “the fact that the price will be higher means that demand will fall, and therefore, it will bring some stability,” he reasoned.

Efforts to get the Manufacturers Association Nigerian (MAN) to comment on the development proved abortive, as calls and text messages to their principal officers were not responded.

However, Nukauba believes that manufacturers and other real sector operators, especially those under the 42 items on FX import prohibition list will be further challenged.  

“There are the 42 items on the prohibited imports; those guys were never going to get served through the formal channels, and the black market was their ready source, and they paid the premium, and the rest of the market paid for it through higher inflation. Now, they are squeezing that supply side further and not providing them a veritable source of access to this flow.”

Possible reversal

Those who believe the CBN ban of BDCs from the FX market is good for the economy and there will be no reversal of the decision, because “This ban is coming at a very high level of political support unlike before. It’s not a decision that came out of the blue; there is a high level of political buy-in, so it won’ t be changing anytime soon.”

Other experts are however sceptical, as Kurfi insists that once the effects become noticeable and unbearable, “the CBN will reverse the decision. This is not the first time, so it is not new that they won’t supply to the BDC. But when they see the issues that will arise from it, they will resume transactions with them. This is because BDCs will get $50 and sell to you, but the banks will never do that; they will eat everything.”

Also arguing on this premise, Ndukauba recalls that “when we look back, this is almost like a repeat of 2016, in terms of the exact same measures – freezing out the BDCs and alleging that they are essentially a conduit for money laundering and all that, and all the challenges that come with the CBN managing liquidity and pressure that come from the FX market and attributing it to these guys.”

Coming out of the quagmire

 As it is many of the respondents to Sustainable Economy do not see a silver lining in the clouds yet except the CBN and the fiscal authorities introduce further measure.

According to Yusuf, 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 and dealt with.

Suppressing the market is like swimming against the tide. It is a difficult battle to win. Moving retail forex transactions from BDCs to the banks is like kicking the can down the road. The same issues would manifest even with the banks,” he said. 

For Ndukauba, succour from Diaspora remittances may not be readily available. “Diaspora flows haven’t quite recovered yet. On the one hand, there was the argument that many of our people who are abroad may have been constrained by COVID and its impact on jobs and job losses, and retrenchment and all that kind of stuff last year, which explains the dip in remittances.

“In addition to that, there may also have been the challenges of people getting spooked with the constant policy adjustments, who then decided to begin to look at cheaper avenues to remit dollars into the country, and one of such is the shift to cryptocurrency. This was one way to send money back home; they will buy cryptocurrency, send it to someone, and the person can then send it here, and they were getting close to black market or open market rates for those conversions. Even though the CBN tried to block it by saying that Nigerians can’t access the exchanges directly through banks, a lot of people have gone into the P to P market that is peer-to-peer, and just dealing directly with each other.”

Ndukauba like Yusuf says the situation calls for a market solution, saying: “We need to address the structure of the market; we need to introduce some form of market mechanisms and allow it to converge. Perhaps to get the exporters, international oil companies (IOCs), merchants and whoever else is able to earn dollars from their offshore activities the freedom to determine how they choose to deal with their counter parties, who are buyers in this case, and essentially allow them to progress on that front.”

He adds that the Diaspora remittances need a boost through confidence lifting “and giving them comfort around the ability to get in and out. There is also the issue with foreign investors and the need for foreign capital flows; unfortunately we are not a preferred destination any longer, and it’s been declining year-on-year.”

Furthermore, he urged the government to find the political will to remove petro-subsidies once and for all, as rise in oil prices may not offer a relief. “Nigeria’s position is rather precarious because of its mono-product crude oil and crude exports and income situation. Unfortunately, we import our refined products and therefore the higher the oil prices, the more expensive the refined products. Even diesel, which had been fully deregulated, the market pays the price at between N278 and N285/litre, but not below N250. But petrol is not like that because it the nation that bears the cost, which is very inefficient because the import numbers at 93 million litres/day are very ridiculous because we were barely doing 35 million, which was why we complained in 2014/15 when it hit 50+million/day and at 93 million litres, with poverty levels increasing over the last couple of years how do you explain this. Is it that the number of petrol-cars suddenly tripled in that space of time or perhaps because all of our neighbours are deregulated, therefore our petrol is cheap enough to go and find market in those places with enough of a premium to justify settling whoever it may concern including all the government agencies.”

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