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
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:
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
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