These included the formal pegging of the naira exchange rate, the centralisation of foreign exchange in the CBN, the restriction of Bureaux de Change to buy foreign exchange as agents of the CBN, the reaffirmation of the illegality of the parallel market and the discontinuation of open accounts and bills for collection as means of payments sectors.
The Foreign Exchange Market was liberalised in 1995 with the introduction of an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected authorised dealers at market determined exchange rate. In addition, Bureaux de Change were once more accorded the status of authorized buyers and sellers of foreign exchange.
The CBN governor however feels the BDCs are no longer performing the role for which they were accorded the privilege of getting foreign exchange from the apex bank, as he noted that their activities have become an hemorrhage to the nation’s scarce resources.
He explained that “the CBN sells $60,000 to each BDC per week. This amount translates to $167 million per week, and about $8.6 billion per year. In order to curtail this reserve depletion, we have reduced the amount of weekly sales to $10,000 per BDC, which translates into $28.4 million depletion of the foreign reserve per week and US$1.476 billion per annum.
“This is a huge hemorrhage on our scarce foreign exchange reserves, and cannot continue especially because we are also concerned that BDCs have become a conduit for illicit trade and financial flows.
Nigeria’s foreign exchange reserves have so far been on the receiving end of this conduit as it has consistently depreciated since 2014. Due to the import dependent nature of Nigeria more foreign exchange is being expended than is been earned and the oil price dilemma has further affected the nation’s fortunes.
Data from the central bank shows that monthly foreign earnings have fallen from as high as $3.2 billion to current levels of as low as $1 billion, as crude prices dropped from a peak of $114 per barrel in July 2014 to as low as $30 per barrel in January 2016.
When in 2005 oil prices fell to $50 per barrel, average import bill for the country was N148.3 billion per month, however in contrast, average import bill for the first nine months of 2015 is N917.6 billion per month, even though oil prices had become less than $35 per barrel.
According to the CBN governor, this put pressure on the country’s reserves which decline by 14.5 per cent last year and has lost 3.5 per cent in the first three weeks of this year. To avoid further depletion in the reserves, he explained that the CBN took a number of countervailing actions including the prioritisation of the most critical needs for foreign exchange.
The limited reserves he said was made available to high priority needs such as matured Letters of Credit from commercial banks, importation of petroleum products, importation of critical Raw Materials, Plants, and Equipment, and payments for School Fees, BTA, PTA, and related expenses.
This has however not reduced the pressure on the foreign exchange market which he notably said had come mainly from speculative attacks, round tripping and front loading activities by actors in the foreign exchange market.
“In total disregard of the difficulties that the bank is facing in meeting its mandate of maintaining the country’s foreign exchange reserves to safeguard the value of the Naira, we have continued to observe that stakeholders in some of the subsectors have not been helpful in this direction.
“In particular, we have noted with grave concern that Bureau de Change (BDC) operators have abandoned the original objective of their establishment, which was to serve retail end users who need US$5,000 or less. Instead, they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction.”
To cover up for the illegal use of CBN sourced foreign exchange, the erring BDCs had resolved to using fake documents such as passport numbers, BVNs, boarding passes, and flight tickets to render weekly returns to the CBN.
Nigeria is the only country in the world where the central bank sells dollars directly to BDCs, and despite the CBN efforts at reducing the number in 2014 when it increased the capital base and cautionary deposit to N35 million each, the number of BDC operators have continued to swell.
The number of licensed money changers had grown according to the CBN from 74 in 2005 to 2,786. This is asides the additional 150 new applications for licenses which it receives every month.
Because the CBN sells a limited amount to BDCs on a weekly basis, some individuals had applied for several licenses so that they can get more cheap foreign exchange from the CBN through the various BDCs which they own.
Analysts have also agreed witth the decision of the apex bank saying it is a wise one that would eventually ease the pressure on the naira and ensure that speculators and round trippers do not take the advantage of the wide gap that was between the CBN rates and the parallel market rates.
Head of Research at Sterling Capital, Sewa Wusu, noting that the move to stop foreign exchange sales to BDCs is a positive one , explained that “some of these BDCs were used for round tripping.
“There were arbitrage opportunities because of the gap between the price that the CBN sells to them and the price they sell to end users and this gap is not good for our reserves especially now that it has gone down to $28 billion.
Also Femi Ademola of BGL said “the decision to stop the sale of dollars to the BDC operators was waiting to happen. The CBN had earlier reduced the amount it sells to each BDC from $60,000 per week to $10,000 per week. While this was due to the dwindling foreign earnings of the nation, it was also in the bid to manage the high foreign exchange demand from that segment which has been identified as artificial.
“The savings from the discontinuation of the sales of dollars to the BDCs which is estimated at between $1.47 billion to $8.6 billion per annum would be used to meet the some of the genuine demand for foreign exchange at the interbank market. The policy also allows the demand for school fees payment and travel allowances to be met at the interbank market.
“Based on the current development, the decision appears to be a wise one by the monetary authority to focus the official (interbank) foreign exchange market on meeting essential demand for international trade while the non-essentials would be met at the autonomous and parallel markets. Although the development may see the exchange rate go up significantly in the autonomous and parallel market in the short term, I think it would stabilize after a while based on demand and supply.”
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