BY PHILLIP ISAKPA & CHARLES ABUEDE
- Analysts react in mixed sentiments; asks if ban is reminiscent of 2016 episode
- Warn of looming Naira devaluation, attendant inflation, loss of investor confidence
- Point how bank cronies own multiple BDCs for racketeering, FX resource bleeding
The wings of Bureau De Change operators in Nigeria may have been clipped by the Central Bank of Nigeria (CBN) with the swift decision last Tuesday to halt the sale of foreign exchange to that segment of the market in an effort to curb the menace of round-tripping, including the facilitation of illicit money flows, profiteering and bleeding of the country’s FX resources. However, as some economic and finance analysts have termed the move as a step in the direction towards the unification of Nigeria’s multiple exchange rates, others have begun sounding to the hearing of all stakeholders about the looming devaluation and dollar scarcity ahead in the short to medium term.
It was a surprising turn of events after last week’s Monetary Policy Committee (MPC) meeting, when all monetary policy parameters where left flat from the last session, that like a bolt out of the blue, Godwin Emefiele, the CBN governor, announced that the apex bank will immediately put a halt to the sale of foreign exchange (FX) to Bureau De Change (BDCs) operators. He also said the CBN would stop issuance of new BDC licenses.
Notably, the action is reminiscent of a similar decision made by the CBN in January 2016 to suspend dollar sales to BDCs in the face of identical FX circumstances (in the form of depleted FX reserves), which was eventually reversed in June, 2016. The governor also cited the same concerns from 2016, including the facilitation of illicit money flows, profiteering and bleeding of the country’s FX resources.
A myriad of analysts have offered mixed views on the issue in the course of last week with some FX traders saying the action is going to be counterproductive, noting that the central bank may be underestimating the size of demand outside the official market and that the policy change will do little to address the sharp disparity in the official and parallel market exchange rates. However, others say that the move is correcting a long-standing anomaly. BDCs are licensed to meet demand for personal and business travel and not for big-ticket items that should translate to demand of over $100 million a week, said one analyst who did not want to be named for this story.
But Uche Uwaleke, a professor of economics and capital market at the Nasarawa State University opined that the decision by the CBN to stop forex sales to BDCs has merits and demerits as it is a step in the direction of unification of exchange rates and bringing transparency to the currency market; as it is in the best interests of Nigerians.
“The move is likely to check round tripping of forex and reduce supply of forex in the parallel market. Further, speculative demand for forex is also likely to reduce. I am aware that BDCs have been accused of being vehicles for bribery and corruption. This will likely be reduced. It goes without saying that a more transparent forex market will improve confidence in the economy and could lead to increased foreign investments. On the flip side, this measure will wipe out the employment opportunities created in the sector with over 5000 BDCs and several others waiting to be licensed. There is no doubt that many of them will fold up. Also, the gap between the AFEX rates and parallel market rates is likely to widen further with dollar shortages in BDC and parallel market segments,” Uwaleke said.
“Overall, it is a bold and salutary decision that deserves commendation. With this move, the CBN seeks to reign in speculative demand for foreign exchange and take on the challenge of meeting all genuine demand. Going forward, the CBN should ensure that purchase of forex via the banks which will now increase is made stress free with minimal documentation. This is what pushes people to the parallel market. The banks should be closely monitored to ensure that they don’t divert forex to the parallel market. There’s bound to be a deluge of complaints from many seeking to purchase forex from the banks. It’s important for the CBN to alert the members of the public on the procedure for reporting refusal to sell forex by banks,” the capital market professor stated.
Back to 2016? What about the round-tripping stench among bankers?
Recall that in January of 2016, the apex bank suspended the sale of dollar FX to the BDCs over similar allegations followed by the directive to deposit money banks to assume responsibilities of FX sales facilitation to Nigerians who are in need of FX items not included in the CBN’s banned 41 items. That decision, however, became futile as insufficient FX supply to banks from the CBN and customers’ apathy to banks’ cumbersomeness kept demand at the parallel market elevated. Consequently, capital inflows through FDI, FPI, and other investment channels declined sharply by 67.2 percent year over year to $1.8 billion in the first half of 2016 as foreign investors shunned Nigeria due to currency risk.
As a result, Nigeria’s foreign reserves and the official exchange rate fell abruptly by 4.0 percent and 43.7 percent respectively to $26.5 billion and N283 to the dollar over the six months period. These developments fuelled a precipitous rise in inflation to 16.6 percent at the end of June 2016 from 9.6 percent in January of the same year. Consequently, the changes escalated the country’s recession impact, as GDP contraction worsened to -1.5 percent after six months in 2016 from -0.7 percent in the previous three months of 2016.
Nonetheless, picking the brains of some economic analysts, they asserted that the decision by the CBN is not entirely a bad idea, but that as with all things that concern policy in Nigeria, the implementation is crucial to its success. Given the constrained capacity by banks to effectively handle all FX demands by corporates, SMEs and individuals, the recent CBN decision could lead to heightened pressure in the FX market that could further depreciate the naira. They noted also that since BDCs can no longer get FOREX from CBN, there is the possibility that other sources they get from could come at significant cost to them and this could be passed to their customers. Essentially, the inflation rate would further rise.
“The ban is a sound policy. The CBN caused it when it failed to divert to the banks the forex given hitherto to BDCs. They are all in the game against an ignorant government. Many of the BDCs are allegedly owned by the CBN boys or their proxies and of course politicians. The CBN was not funding BDC so outrageously until 2009 and all CBN governors kept the total number below 300 until 2009-2014 when the number skyrocketed to over 3000 and CBN was allocating about $5 billion plus to them annually. While the Nigerian foreign currency supply was huge in 2010-14 and accommodated the poor policy, the governor since 2014 grossly dropped the ball by continuing in the same till now. Between 2015 and 2016 the CBN still gave several billion of dollars to BDCs in excess of $4 billion annually, despite the calamitous crash in Nigerian supply of FX, making it imperative the revision of the hitherto unintelligent policy,” a consensus of economists told Business A.M.
In the meantime, some market operators have noted that “there is nothing that BDCs do that banks cannot do better” and that over 6,000 BDCs add little or no value to the market today. That said, financial markets will react to news and the announcement is expected to spark volatility in the parallel market for foreign exchange, more so because of the timing of the announcement. The move is coming in late July when demand for foreign exchange for personal travel and school fees is typically high.
But while there is an overwhelming support for the decision to stop supplying FX to BDCs and take this to the banks, banking industry sources say that the CBN would have to double its surveillance in this regard. Multiple sources in the industry told Business A.M. that even before the stoppage to the BDCs, some bankers (not necessarily with the knowledge of the banks as institutions) were neck deep in the forex round tripping game.
“Honestly this is one of the best things that can happen to Nigeria. Some individuals own as many as 150 BDC licenses. And every biddings gives them about N500,000 to N4 million on each of them depending on how many they used for the bidding that week. A market fraught with significant supply shortage is prone to misallocation as in the case with the foreign exchange. The high spread between the I & E window and BDC market is a strong incentive for market participants to arbitrage in the forex market. Meanwhile, frequent switching from retail market to wholesale market has never been a panacea for forex challenges in our economy. We should embrace the pains of a market driven economy and allow growth to be achieved through efficient allocation,” they asserted.
Business A.M. learnt of how individual bankers got on the round-tripping slippery slope, especially abusing the FX window opened by the CBN for SMEs, and how crooked bankers bypass the submission of Form M for importation, which then makes it easy for round tripping and for bankers to make a kill.
“It is difficult to see bankers selling at real rate, except the CBN makes great efforts to monitor and police rogue bankers in the system, who have been profiting from years long round tripping of fx,” one banking industry insider told Business A.M.
The surprise that has trailed the CBN decision on the BDC segment of the FX market appears to stem from the number of operators, about 6000, coupled with the unabated level of FX demand, while there is a backlog of FX demand estimated at marginally above $2 billion. It elicits fear that it would likely lead to increased demand for the dollar, leading experts to believe that it could bring in speculators to play in the FX market.
Analysts: Devaluation, speculation, FX users burden
Economic analysts at Pan African Capital Research in a research note to Business A.M., said: “The decision of the apex bank to discontinue the sale of FX to BDC is not expected to reduce the apex bank’s supply to Nigeria’s FX market. The constant intervention of the CBN in the market will still continue, though through a formal channel such as the commercial banks. However, this may lead to speculation in the FX market and further depreciation of Naira.”
They opined that the fact that operators will source for FX elsewhere, such as banks, will give room for more widening profit gaps as they will sell to users who are readily available to buy for urgent purposes. Thus, bring about more dollar scarcity due to hoarding by some banks and BDC operators who obtained such from commercial banks and in turn bring more waning of the Naira value.
Analysts at United Capital noted that “the decision is a welcome development to curb the persistent round-tripping practiced by BDCs in Nigeria. BDCs have historically sold FX supplied to them by the CBN above the CBN-dictated price in the parallel market, representing a form of “legalised” FX round-tripping. That said, while we think the policy decision is not necessarily bad, we are concerned about the ability of the CBN to sustain stability in the official windows as depleted reserves and pressured inflows remain significant concerns. Thus, as we expect the CBN to remain incapacitated in meeting the economy’s huge FX demand, we think this policy portends additional FX woes for market participants, as we anticipate a kneejerk reaction, which would lead to a steep depreciation of the Naira in the parallel market.”
However, Afrinvest Research analysts posited that to avoid a repeat of the 2016 episode, the CBN should “Provide better clarity on its exchange rate policy to gain the confidence of foreign portfolio investors; increase FX allocation to banks to enable them to cater to all genuine demands; scale back banks’ FX processing requirements to attract Nigerians into the official FX loop; intensify public awareness on the need to embrace the latest development, to prevent unfavourable reactions that could further promote speculative trading; and provide more funding to local producers of the now 44 items restricted from accessing FX at the official rate, to mitigate the likely pass-through effect of higher costs to consumers.”