CBN's series of policies impacts forex volatility

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The deluge of foreign exchange policy measures from the Central Bank of Nigeria (CBN) to stabilise the naira has been criticised by analysts who told Businessday weekend that what the economy needs is quality initiatives rather than 10 policies announced by the apex bank in less than six months.


The analysts said the economy is currently suffering from policy overhang. According to them, the CBN, apparently suffering from policy hangover, Thursday sent a phoney statement using a Yahoo mail address to media houses (BusinessDay not included) announcing the bank’s special forex intervention.


And excited by the content, the media houses published the statement as exclusive stories to the chagrin of members of the public who had prior information about the syndication.

Between September last year and last weekend, about 10 policy measures have been introduced with the latest one advising banks not to grant credits for the purpose of capitalisation of the Bureau de Change (BDCs) as erring banks will be appropriately sanctioned.


Indeed, CBN was the first of the major African central banks to begin its rate easing cycle in response to the worsening of the global credit crisis in September 2008 with sweeping measures, including a 50 basis points cut in the policy rate, a halving of the reserve ratio from 4 to 2 percent, and a 10 percent point cut in the minimum liquidity ratio of the banking sector were all put in place at a mid-September 2008 emergency meeting of Monetary Policy Committee (MPC).


This was followed subsequently by other policies including reduction of banks’ foreign exchange net open position from 20 to 1 percent, introduction of Retail Dutch Auction System (RDAS) to replace Wholesale Dutch Auction System(WDAS), introduction of exchange rate management within band +3, direct intervention in foreign exchange management by selling to registered BDCs of deposit money banks as well as last weekend’s reforms of the BDCs segment of the forex market which banned banks from financial assistance to meet up with the N500 million capitalisation.


But some analysts and BDC operators at the weekend said all the policies, including the ones before December 11 which were basically targeted at liquidity and exchange rate and the others for stabilising foreign exchange market have not had the desired impact.

They said the restructuring of BDCs was akin to forcing them out of business since some of the policies like the categorisation to A and B which requires the former to among other requirements have a minimum paid-up capital of N500 million verifiable at all times, mandatory deposit with the CBN of US$200,000.00 – non-interest bearing and non-refundable application fee of N100,000.00 with licensing fee of N1.0 million among others were aimed at forcing them out of business. To some of the operators, one of the resultant effects is the continued depreciation of the naira and the widening gap between official and parallel markets.


But while BDC operators were scouting for the funds and CBN battling to curtail the growing anxiety in the foreign exchange market occasioned by policy summersault and inconsistencies, the apex bank through its acting director, banking supervision, D.A.N Eke, said though a circular: “It has come to our notice that in a bid to meet the new capitalisation requirement in our circular ref. TED/FEM/FPC/01/026 dated February 26, 2009, some Bureau de Change shareholders are seeking facilities from the banks to capitalise their institutions. We wish to remind all deposit money banks and other financial institutions that our circular BSD/DO/CIR/VOL1/8/2000 dated November 9, 2000 that prohibits borrowing to capitalise banks is also applicable to the BDCs as financial institutions.


“For the avoidance of doubt, capital verification and other applicable tests will be carried out on all funds utilised to capitalise BDCs and those found to have been borrowed from the deposit money banks and other financial institutions will be rejected. Banks are therefore advised not to grant credits for the purpose of capitalisation of the BDCs. Erring banks will be appropriately sanctioned.”


But the official market is not spared from the current crisis as details from the only RDAS held last week showed the naira losing marginally to close at N146.60 against the dollar, a loss of 32 kobo from the previous exchange rate of N146.28. Besides, CBN could only meet 53.83 percent of the foreign exchange (forex) demand at the RDAS when it sold $699.86 million out of the $1.3 billion demanded by dealers.


Farouk Suleiman, president of the Association of Bureau de Change Operators of Nigeria, told BusinessDay last week that the association had made its presentation to CBN over the restructuring of BDCs.


Speaking in measured tones, Suleiman said “the essence of any policy is to benefit all the operators and that is why we have made our stand on the policy to the CBN.” However, the response to ABCON’s requests and observations may be the banning of any likely assistance from the banks in order to meet their aspirations of remaining in business.


But, another member of the association who spoke to BusinessDay before last weekend’s circular said: “My initial response is that Chukwuma Soludo [CBN governor] has succeeded in taking us back to the era of the military administration when there was a big gap between the official and the parallel markets. It was a big feat he achieved when he decided to liberalise the market.


“The crisis in the market today is caused by CBN’s inability to come out to the public to admit that Nigeria is suffering from the global financial melt down just as other civilised countries did, but rather the regulatory authorities are passing blames. The questions I will ask are; how did the rates between official and parallel markets converge between 2006 and late 2008, to be specific, December? How come BDCs were not known to be sources of leakages until December 2008? Why the coincidence when the global melt down surfaced? Until December 2008, BDCs were given $300,000 per bidding session meaning $600,000 per week, but CBN reduced it to $100,000 per bidding, meaning only $200,000 per week.


“And as at the time of $600,000 per week, the highest margin every BDC could make then was 60 kobo which was less than one percent because there was enough supply to meet clients’ demand. But when the issue of how to finance the budget for 2009 came up due to the fall in crude oil price, CBN started to increase the exchange price by N8 at every bidding session and the exchange rose from N116 to N152 in February.


“When Soludo was confronted at the Senate, he made us to understand that it was deliberate in order to be able to finance the 2009 budget internally and also to discourage foreign investors from taking their funds away. How then can he turn around to say BDCs are responsible for the increase?


“How do you expect a small player to deposit $200,000 non-interest, recapitalise to N500 million just to operate a BDC which is higher than the requirements for micro finance banks?nThe implications are manifold, there can never be convergence between official and parallel market rates, people will lose their jobs, unquantifiable frauds and round tripping will be the order of the day, CBN will loose control of the events that will happen, ABCON will cease to be relevant and unable to control its members.” - BusinessDay

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