Festus Akanbi, in this piece, captures the mood of the nation’s financial sector few days after the latest review of foreign exchange rules by the Central Bank of Nigeria, saying while the real sector welcomes the new regime of forex rules, bureau de change operators are counting their losses
After the initial all-is-well posture in the face of protests over strict regulations of the foreign exchange market, the Central Bank of Nigeria last week decided to soft pedal on its rigid position on forex.
Even the Governor of Central Bank, Mr. Godwin Emefiele, had told THISDAY penultimate Saturday that it was not yet time to review foreign exchange rules, an assurance corroborated by the spokesman for the apex bank, Alhaji Ibrahim Muazu, a director of the bank.
When our correspondent confronted Muazu with the speculations that the apex bank was about to bow to pressure from different quarters on the need to review foreign exchange market rules, he denied the report in a terse sms message saying, “Festus, it is not true.”
A very dependable source had hinted of a plan by the leadership of the Central Bank to unveil a new set of foreign exchange rules, citing the harvest of pressures from the International Monetary Fund, (IMF), the National Assembly and the organised private sector as one of the reasons.
So, in spite of the denial by the leadership of the apex bank, it was not a surprise when Emefiele, sandwiched by his deputy governors, at a press conference in Abuja last Monday, announced the
stoppage of foreign exchange sales to Bureau De Change operators by the CBN as one of the new policies aimed at conserving the nation’s foreign exchange earnings.
For the record, the weekly funding of the BDCs, which has been in operation for the past 11 years cost the CBN $8.6 billion yearly based on $60,000 per operator.
Under the new dispensation, the CBN also gave a go ahead to commercial banks to accept cash deposits of foreign exchange from their customers. The decision, according to CBN, is not intended to be punitive but rather to ensure it is better able to carry out its mandate effectively and efficiently, which guarantees preservation of the nation’s scarce commonwealth.
To avoid further depletion of the reserves, the CBN also decided to prioritise the most critical needs for foreign exchange.
The list include the provision of foreign exchange to matured letters of credit from commercial banks; importation of petroleum products; critical raw materials, plants, and equipment; and payments for school fees, basic travel allowance and personal travel allowance, and related expenses.
Sourcing Forex from Autonomous Sources
Emefiele said the BDC operators would now source their foreign exchange from autonomous sources, which it would monitor to ensure that no operator violates anti-money laundering laws.
The governor said the decision had become necessary due to the financial burden being placed on the apex bank and the limited foreign exchange reserves.
He said, “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 $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.”
Besides, CBN accused the operators of violation of the rules of engagement, with the majority only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates.
It said that following the drop in crude prices from a peak of $114 barrel in July 2014, to as low as $33/barrel in January 2016, the country’s reserves had suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the market.
Foreign Earnings Depletion
This fall in oil prices has depleted CBN’s monthly foreign earnings from as high as $3.2 billion to current levels of as low as $1 billion. Still, the demand for foreign exchange by mostly domestic importers has risen significantly, even more than when oil prices was around $50 per barrel for an extended period of time in 2005.
Our average import bill was N148.3 billion per month in 2005. In stark contrast, our average import bill for the first nine months of 2015 is N917.6 billion per month, even though oil prices are now less than $35 per barrel.
The net effect of these combined forces unfortunately is the depletion of our foreign exchange reserves. As of June 2014, the stock of Foreign Exchange Reserves stood at about $37.3 billion, but has declined to around $28.0 billion as of today,” he said.
The bank chief said that despite its continued sale of dollar around N197 to these operators, they had in turn become greedy in their dealings with ordinary Nigerians, selling as high as N250 per dollar.
BDC Operators Kick
However, when THISDAY got in touch with the acting President of the Association of Bureau de Change Operators of Nigeria, (ABCON), Alhaji Aminu Gwadabe, it was a protest galore. He said while the association would appreciate the end of the programme, it would not accept the blanket generalisation of the group as bad.
Gwadabe, who also spoke on a Channels Television programme monitored in Lagos during the week, said the action of the CBN amounted to a devaluation of the currency.
He explained that the latest action of the apex bank would lead to job losses, saying more than 10,000 employees of the various bureau de change firms may be fired as it becomes difficult to operate. Gwadabe said with the present reality, the N35 million deposited at the CBN by each operator is yielding interest to the apex bank while the owner of the money are now being made to grope for business.
He said that the lot of the BDC operators had only been woeful, as its total mandatory deposit to CBN estimated to be N150 billion, only earned three per cent, while commercial banks had at various times earned 11 per cent.
He condemned the criminalisation of the activities of BDC, explaining that although there are bound to be deviants among operators. He insisted that majority of the operators were law abiding.
Gwadabe said the allegation that some operators are selling dollars far above the range given by banks remains an allegation since the apex bank has not yet arrested any operator for the crime.
The ABCON boss said most of the problems identified by the CBN are traceable to black market operators. He said it has been difficult to deal with street traders because there is a link between the financial market and parallel marketers, adding that it will take a political will to check the activities of street traders.
Senate’s Intervention
However, THISDAY gathered that the apex bank had to give in to the ground swelling of pressure, which climaxed during the recent visit of the Managing Director of International Monetary Fund, Christine Lagarde, to Nigeria.
A source disclosed that as a former parliamentarian, what Lagarde did was to use the instrument of the National Assembly to mount pressure on Emefiele and his team, a development, which left the CBN with no alternative than to bow to the wishes of the people.
“The fact is Laggard came at a point when calls for a review of the foreign exchange market rules was at their loudest. But this time around, what she did was to lobby the National Assembly because she knew once she was able to get the buying of the lawmakers, whatever measures taken by the CBN would become law. So, the Senate President, Bukola Saraki, and other members of the National Assembly invited the leadership of the CBN. At the end of the day, the Senate leadership was able to secure the commitment of Emefiele on the need to review foreign exchange rules,” the source said.
Market Reactions
The Head of Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said the stoppage of forex sale to the BDCs meant that the CBN wanted everybody to apply to the banks for dollars.
He believed the pressure now would move from the BDCs to the parallel market. We will see significant spike in the value of the naira at the parallel market because the little supply to the BDCs have also helped to cushion the demand at the parallel market.
The Afrinvest official said the development would further compound or increase the spread between the parallel market and the interbank market. “So, it will also increase round-tripping and unethical practices within the financial system,” he was quoted in a newspaper interview.
On the lifting of the ban on cash deposits into domiciliary accounts, Ebo said, “I am still skeptical about how this will work except they are also assuring us that if you deposit it, you can consummate business with it.”
The Director-General, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Mr. Emmanuel Cobham, said although the BDCs are necessary in the economy, they are licensed entities and should, therefore, source for their own funds.
Those who hailed the policy included the Director-General, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, who noted that the review had addressed the concerns of economic operators.
Managing Director of a Lagos-based manufacturing firm, who would not want to be named, told THISDAY that the development will enable the regulators to concentrate on the real sector’s needs. According to him, the priority list drawn by the CBN favours the productive sector of the economy and since the apex bank has decided to stop feeding the BDCs, banks will have more supply of foreign exchange which they can easily make available to the real sector for the importation of operators’ raw materials and machineries.
“This development has now made it necessary for the BDCs to source for foreign exchange elsewhere and this is a good news to real sector players,” he said.
He however, feared that the new policy would bring about new pain to the operators and the apex bank.
He said, “The pressure on the official window will persist. The risk of round-tripping and distortions in the foreign exchange market will consequently remain high.”
However, random survey in parallel market in Lagos, Kano and Abuja last week showed that the policy review had failed to lift the value of the naira as the currency exchanged for 300 against the United States dollar in Kano, 290 in Lagos and 292 in Abuja.
Financial experts, including the leadership of ABCON said the naira would decline further, while private sector operators described the move as a welcome development.
Reacting to further depreciation of the value of naira, Gwadabe said “There is cut of (dollar) supply to the market. The BDC sub-sector has been murdered. We are not coping. The naira is going to head northwards. There is no solution in sight.
Facts on BDCs Operations
Over 90 percent of dollar inflows into the Central Bank of Nigeria come from proceeds of crude oil sales.
• But oil prices have fallen from US$116 per barrel in June 2014 to US$33 per barrel in January 2016, representing a decline of over 70 percent
• When oil prices were high, the CBN got about US$3.2 billion inflow every month. Today, the Bank receives less than US$1 billion monthly.
• Yet, our import bill, which used to be N148 billion per month in 2005 (last year we had $50/barrel oil), is now about N920 billion.
• Given this difficult scenario, the CBN had NO CHOICE but to prioritize the allocation of FX to various groups/goods/services.
• On BDCs, Nigeria is the only country in the world where the Central Bank sells FX directly to BDCs.
• Despite the benevolence of the CBN, greedy BDCs bought at N197 but sold at N270. Hence, the intended “subsidy” was not reaching Nigerians, as is the case with fuel subsidy.
• This arbitrage opportunity attracted many unscrupulous persons into the BDC business. Before CBN started selling FX to BDCs, there were only 74 in 2005. In the 10 years since CBN started FX sales to BDCs, the number is now 2,800 with 150 applications for licenses every month.
• Note the similarities between the rise in number of BDCs and what happened in the oil industry when the number of oil marketers rose sharply from under 20 to almost 150 in the height of the subsidy scam.
• At its height, the Bank used to allocate US$8.6 bn to BDCs per annum. This potential saving is better reallocated these funds to raw materials, plants, equipment, fuel imports, BTA/PTA, etc.
• Indeed, why should a business enterprise be established only on the basis that the government must supply its goods or raw materials, especially when the government DOES NOT makes these products? How can someone open a tomato shop and insist that the government must supply the tomatoes for him/her to sell? Why can’t the trader source the goods?
• This policy is right and needs to be supported. Everyone must be encouraged to Make Money, Not Trade Money!”
Source: CBN
Thisday
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