CBN Stops Sale of FX to BDCs, Holds Policy Parameters Constant

Proshare

Tuesday, July 27, 2021 / 8.00PM / TheAnalyst, Proshare Research / Header Image Credit: Guardian Nigeria


In a move that took local Nigerian financial markets by surprise, the Central Bank of Nigeria (CBN) embarked on sweeping measures to clean the rot that had allegedly occurred in the trading of foreign exchange at Bureau de Changes (BDCs). The CBN alleged that the BDCs had abused the regular sales of foreign exchange to them by selling FX at rates above the agreed guidelines, thereby engaging in what the regulator called 'rent seeking'.


At a press briefing held today Tuesday, July 27, 2021, the CBN Governor stated that the CBN would also no longer approve BDC licence applications. The decision reached by the MPC was premised on the committee's observation that the BDCs had, contrary to their mandate, become wholesale dealers conducting large FX transactions above their sales limit of $5000 per person and instead concluded single transactions worth millions of dollars.


The Central Bank Governor, Godwin Emefiele, noted that there had been an astronomical rise in operators who now number 5,689 as of June 2021 a significant rise from 74 dealers in 2005. He further noted that the regulator received an average BDC application of 500 monthly. The CBN boss said that BDC operators disregarded prevailing rates and spurred the gradual dollarization of the domestic economy.


According to the Governor, Before the Bank's decision, the CBN sold $20,000 weekly to over 5,000 BDCs amounting to over US$100m weekly and US$1.57bn annually. In a bid to reduce the pressure on the country's FX,  the CBN Governor directed all commercial banks to set up FX Teller points in all branches to ensure the direct sale of FX to buyers.


Rethinking Multiple Exchange Rates

Past governments have sought to respond to Nigeria's balance of payments challenge by creating a legal parallel (or dual) foreign exchange market to avoid the short-term effects of a depreciation of the Naira on domestic prices while retaining some degree of control over capital outflows and international reserves.


BDC operators constitute a parallel market. Over the last few months, the BDC rates have hovered between $472.4 and $500 in January, while the official rate has surged between $381 and $411.27 implying a premium gap of 28% (see chart 1 below).

 

Chart 1: Comparative Average Movement of I&E FX and BDC Rates 2021 

Proshare Nigeria Pvt. Ltd.

Source: CBN, Proshare Research

Analysts believe that this is unsustainably high and capable of disincentivizing foreign investment, underscoring the CBN's move to stop the weekly allocation of FX to BDCs.


Policy Levers are Unchanged

Meanwhile, the MPC decided to again hold policy parameters constant considering the recent inflation figure (17.75%) - the third straight fall- the MPC expressed optimism that the inflation rate would continue downward trend but since it remains in the upper double-digits the banking sector regulator decided to hold policy rates fixed at the previous rates:

  • Monetary Policy Rate (MPR) - 11.50%
  • Asymmetric corridor around the MPR - +100/-700bps
  • Cash Reserve Ratio - 27.50%
  • Liquidity Ratio - 30.00%


Related Links

1. July 2021 MPC Meeting: CBN Holds All Policy Parameters, Stops Sales of FX to BDCs - Jul 27, 2021

2. CBN Suspends FX Sales to BDCs Until Further Notice  - Mar 26, 2020

3. CBN FX Sales ban to BDCs:financial and market players react - Jan 12, 2016




Proshare Nigeria Pvt. Ltd.


 

Related News on Monetary Policy

1.      CBN Communique No. 137 of the MPC Meeting - July 26-27, 2021

2.     MPC Likely to Hold Rates

3.     The Rationale for No Change in the MPC's Stance

4.     Personal Statement of MPC: If It Ain't Broke...

5.     Personal Statements by the MPC Members at the 136 MPC Meeting of May 24-25, 2021

6.     Double-Digit Growth in PSCE in May 2021

7.     System Liquidity in Deficit on Persistent CRR Debits

8.     Intricacies of Liquidity Management in Nigeria

9.     Steady Growth in Private Sector Credit Extension in April 2021

10.  Post-MPC May 2021: Status Quo Justified but Economy Still Shackled

11.   May 2021 Meeting: Another MPC Decision to Wait and See

12.  CBN Communique No. 136 of the MPC Meeting - May 24-25, 2021



Proshare Nigeria Pvt. Ltd.


 

Related News on Forex

1.      IEFX Market Total Transactions Value Decreased by $325.65m WoW, Representing 49.86% Decline - FMDQ

2.     FMDQ Foreign Exchange (FX) Market Analysis Report for Week-Ended July 16, 2021

3.     FMDQ Foreign Exchange (FX) Market Analysis Report for Week-Ended July 9, 2021

4.     Gross Official Reserves Declined by US910m to US33.32bn in June 2021

5.     FX Outflows Still Below Pre-Pandemic Levels

6.     Continuing Underperformance on Remittances in Q4 2020

7.     FMDQ Foreign Exchange (FX) Market Analysis Report for Week-Ended July 2, 2021

8.     Foreign Exchange (FX) Market Analysis for Week-Ended June 25, 2021

9.     FX Reserve Hits 13-month Low Despite the Significant Rebound in Oil Prices

10.  Telecoms: FX Scarcity Continues to Bite Hard

11.   Foreign Exchange (FX) Market Analysis for Week-Ended June 18, 2021

 

 

 Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

READ MORE:
Related News
SCROLL TO TOP