CBN Targets BDCs to Inject Liquidity and Curb Hoarding in FX Market

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Following the controversy over a directive by the Central Bank of Nigeria to Bureau De Change operators to henceforth access foreign exchange, particularly the United States Dollar, at least three times a week, Olaseni Durojaiye examines the issues in the debate and presents the views of stakeholders

The recent directive of the Central Bank of Nigeria to Bureau De Change operators to buy the United State Dollars from money deposit banks thrice a week has set the apex bank and the BDC operators on a collision course. Both sides have taken different positions on the directive, which analysts see as a further interference by the CBN to safeguard the value of the naira against the dollar.

Many have expressed doubts about the capacity of the BDCs to comply with the CBN directive as well as the capacity of the apex bank to enforce compliance without rupturing the fragile balance in the country’s FX market.

Law of Demand and Supply

The directive might have been aimed at ensuring availability and affordability of USD, especially as the summer season approaches, when many intending travellers would need the dollar for their travels. But some analysts say moral suasion would have been a better strategy by the CBN, as opposed to force or compulsion. Those who hold this view believe CBN’s tone of compulsion negates the spirit and law of demand and supply, which should rule the foreign exchange market.

Challenges

The directive has also caused the BDCs to flag operational challenges. The BDC sector, findings reveal, is confronted with many challenges, such as multiple exchange rates, bank charges, value-added tax, and commission on turnover, among others.

There is also the threat posed by parallel market operators and illegal international money transfer operators.  Findings show that activities of unlicensed money transfer agents have been on the rise due to certain transactional challenges in the country’s FX market. Many Nigerians in the Diaspora, particularly the United States, now patronise such unlicensed operators due largely to ease of transaction.

However, it could not be ascertained if the activities of such operators pose much threat to the operations of BDCs, as claimed by the BDC operators.

Meanwhile, the BDC operators have also identified the issue of rates disparity as a challenge to their operation. According to the BDCs, while they buy dollar from IMTOs at N360 per $1 and sell to end users at N361.5 per $1, the CBN sells to commercial banks at N357 per $1 and the banks sell to end users at N360 per $1.

Rejection

The Bureau de Change Operators have kicked against the new forex purchase directive issued by the CBN. The CBN had, in a statement on Sunday, said banks must now attend to customers’ forex needs over the counter and BDCs must purchase forex three times a week.

The CBN statement read, “All BDCs shall henceforth access dollars from the CBN on Mondays, Wednesdays and Fridays. It is compulsory that all BDCs access currency at least three times weekly.

“Any BDC that fails to access the FX window at least three times weekly shall have their license reviewed by the CBN. Compliance is compulsory.”

However, reacting to the directive, President of Association of Bureau De Change Operators, Aminu Gwadabe, was reported as saying that the directive will negatively affect the operations of the BDCs. Gwadabe also highlighted some of the challenges they faced.

“The CBN’s directive at this time of our operational difficulties is, no doubt, precarious and vague and was intended to emasculate a sector that has helped the system to stabilise and, thus, unacceptable,” he said.

The ABCON president noted that the BDCs were heavily regulated at the moment and any further steps in that direction will not augur well for their operations.

Gwadabe stated, “The BDC sector is confronted with many challenges, such as multiple exchange rate, abnormal bank charges, value-added tax and commission on turnover, parallel market operators and illegal international money transfer operators (IMTOs), porous international borders, complex documentation requirements and poor capacity/ skills of operators

“ABCON is, therefore, using this opportunity to appeal to the CBN to take urgent steps to review the rate at which the dollar is sold to BDCs in order to boost on-going recovery of the naira against the dollar.”

Analysts

Stakeholders have been reacting to the CBN directive. Chief Executive Officer of Cowry Assets, Johnson Chukwu, told THISDAY that the motive of the directive was to “inject liquidity in the FX market and depress the spread in exchange rates.” Chukwu noted that prior to the intervention, the USD had appreciated against the naira to the tune of N360, up from around N353 per $1.

Executive Director, Corporate Finance at BGL Capital, Olufemi Ademola, spoke in a similar vein, adding, however, that the directive comes with “mixed feelings.”

According to Chukwu, “The motive behind the directive was to inject more liquidity in the FX market and depress the spread by increasing supply, then compel the BDCs to bid for dollars at least three times a week. This creates a sense of urgency and increases the velocity to sell among the BDCs, as against hoarding it.  This is an ingenuous way to force the BDCs to sell at the price that the buyers are ready to buy, as against the price that they are ready to sell.”

Ademola said, “The directive comes with mixed feelings. I believe the CBN does that to manage the spread in exchange rate and make it stable, especially with the approach of summer, when many people will require dollars for their travels.” He added, however, “You don’t force people to buy, whether they are able to sell or not. It is a good thing for the CBN to say they could buy to encourage availability and affordability but it should not force or compel them to.”

Economist and senior research fellow at the Nigeria Economic Summit Group, Wilson Erumebor, told THISDAY, “Perhaps, what the CBN is trying to do is to increase access to FX. I think moral suasion, that is, persuading the BDC operators, would however be effective in achieving the above objective.  In my view, there needs to be some dialogue between the BDC operators and the CBN to examine this issue.”

Erumebor said, “Another issue that needs to be discussed by both parties is the concern raised by some BDC operators on the disparity of rates in obtaining FX between the banks and the BDC operators. “

On the issue of rate disparity, Ademola said, “I don’t think that is a valid complaint. When the CBN sells  dollar to banks, the banks sell at regulated price and to a controlled market then render accounts of how and who it is sold to, to the CBN. It is not the same with the BDCs. The BDCs sells their supply at the parallel market, where they could sell to anybody at whatever price.”