Mahmud: Nowhere in the World are BDCs Spoon-fed

The Director, Monetary Policy Department, Central Bank of Nigeria, Dr. Hassan Mahmud, in this interview on Arise News Channel, spoke extensively on issues surrounding the decision of the banking sector regulator to discontinue the sale of foreign exchange to Bureau De Change operators. Nume Ekeghe presents excerpts:

What is the new horizon for foreign exchange foreign exchange management by the CBN based on last Tuesday’s announcement?

You are very much aware and like all players including analysts in the economy, of the teething problem we are having with exchange rate and particularly the persistent depreciation of the naira and the constant pressure, demand pressure and the shrinking of the supply side of it. And we have also seen that a very high pass through from that behaviour of exchange rate to inflation and for other parameters of the economy.

So, the link is so strong and it is becoming more intensified and the bank needs to at least address substantial parts of those distortions coming into the economy. One big area that was a major issue was the behavior in the BDC segment of the market. It got to a stage that you could not differentiate between the BDC market or BDC rate and the parallel market rate or the black market rate.

BDCs are supposed to be formal institutions licenced by the central bank with licencing guidelines, with what and what you’re supposed to do. It is supposed to be the retail end of the market to moderate prices at that level because of the shocks we constantly see. We always regard that segment of the market as very little, insignificant; so we feel it is not going to really impact on the other parameters of exchange rate. But with time we have come to see a lot of noise in that part market and that has generated a lot of issues around the transparency of the conduct of that market. So, there was a need for the central bank to come in to put things in perspective and allow the market system to operate in a very efficient manner. It became a distortion or friction within the market’s smooth operation mechanism.

Does this represent a paradigm shift in the foreign exchange policy by the central bank?

Given the kind of structures we find in the economy and how we need to reach that retail end of the market and the Governor also gave an example that nowhere in the world that you see a central bank spoon-feeding a forex window by giving them direct foreign exchange cash. So, while that stoppage came, anybody that wants to go into invincible or any transaction of foreign exchange should go to their banks. One, with the banking system or the commercial and deposit money banks, monitoring is going to be more efficient, their transactions can be seen every day and you should expect some level of responsibility given even the capital base and the professional base of those operating in that system.

So, for those that want to do their Business travel allowance (BTA), personal travel allowance (PTA), school fees, medical, they can also go through their commercial banks and take those funds for foreign exchange requirements from their commercial banks. And we also gave a clause, in the event that you don’t get this, there are numbers you call and email you’re going send your complaints to and also gave the banks the matching order to disburse these funds with minimum documentation requirements, sufficient enough for them to be able to ascertain that this transaction is genuine.

The announcement on Tuesday will it be permanent or as a stop gap measure?

From the language the CBN Governor spoke, for now it is permanent, it is not a stop gap that after one month, one year we are coming to reverse this. It is something that has been said, even the BDCs applications that are under processing, all that is going to stop and all funding and foreign exchange requirements should go to the commercial banks.

What will be different compared with what was announced in 2016?

This time around there’s going to be stricter monitoring and like I have said, the banks themselves know what is on their shoulders now, looking at where we are coming from in terms of taking this off the BDC segment because of the distortions and irregularities and arbitrages that we saw in that market. And so the banks know that this is a more serious burden on them and it’s something that has to do with their reputation and the fact that the central bank has enough tools within its purview to monitor those banks and also penalise those that also fall off the line. So, in terms of the efficiency of it, because we have also emphasised that this flows will go to the bank, the supply side as much as possible will be taken care of. The central bank will try as much as possible to meet that side and then the transparency of it will also improve for even other investors that want to have access to foreign exchange. So, in terms of the results, we expect to see a better outcome in terms of the efficiency, the delivery of foreign exchange, transparency in the transactions, the documentations that would be required would be verifiable by both the regulators and even the banks that are supposed to disburse those funds.

Is the move by the central bank in line with the advice by the World Bank and the International Monetary Fund that suggested that the CBN should narrow the gap in the exchange rate windows in Nigeria?

It is part of the issue, but substantially the price distortion that we saw in terms of BDC transactions or in terms of black market transactions. You know several times when people make analysis and are referring to BDC rate, invariably they are referring to the black market rate. Even multinational institutions also use that rate, which is not a true reflection of the fundamentals of the market. So, with that distortion taken out of the system, the international community will also see that there’s transparency. The rates, whatever it is, is not the issue, it’s the price discovery mechanism that brings about that rate. If it’s a reflection of the fundamentals of the economy, it’s a reflection of demand and supply in the economy, it’s a reflection of trade movement or trade volume in the economy. Then, even with services, you will start seeing some trust and market confidence in that segment.

Invariably, all players and stakeholders would take this as a very positive move by the bank and a very bold move to address that distortion coming out of that market failure.

Do you think this will keep the rate at market-determined level?

I think this will also bring the rates to a kind of equilibrium point. It is not like you won’t have access to those transactions or you don’t have access to funds to do those kind of transactions, but it is just that you get them from a different platform. A platform that is more dependable and more trackable. So it’s not that those services at the retail end of the market are going off the market and even the new rule does not even say that BDCs are banned. So, if the BDCs can raise their funds from other sources, fine.

But for this transaction, because we want to meet the domestic demand for this foreign exchange requirements, this is an alternative window where you can use to get this. So, if you still have access to that, I think from now you will start seeing a more efficient price mechanism in terms of the rates that you’re seeing for the invisibles, the ones that go for school fees, BTA, PTA and all their medicals and travels. We know in the past that BDCs got their foreign exchange at a particular rate, the central bank gives the BDCs at a particular rate and there is a margin that is already agreed to be paid on it.

But nobody goes to the market and get that rate, the banks cannot do that to you because you have a board in the banking hall that tells you what is the buying and selling rate and if it’s going beyond that, you can as well query the bank or write to central bank, that this is what we’re having and that’s monitoring.

At what rate would the central bank now be selling to the banks?

Well, for now I don’t know exactly what rate, it’s going to happen, but within this structure that is coming up, that will be agreed but most transactions now are now NAFEX plus a particular percentage of 0.22 per cent.

So, I don’t think there will be much deviation from that, don’t forget we used to give the banks foreign exchange for invisibles – $100 million. So, there was a rate that was being used for that, there won’t be much difference. The rate is not a fixed rate so we call our exchange rate regime a Managed Floating Rate. So, that would depend on the movement in the NAFEX market but I know that it’s a margin above the NAFEX rate that plays in most of this market because the NAFEX rate from our own understanding of the behavior of the market reflects the real demand and supply determinants of foreign exchange.

The commercial bank said that they are prepared and ready to work with the central bank on the expected surge in customer demand which is expected. So, is the central bank ready to meet the supply side here which has been a major issue?

Central Bank cannot meet the demand of the entire economy because we don’t print dollars. So, it is a function of how much inflows we get. So, while we are also working on getting alternative supply sources, we are also managing demand and one of the major ways to manage demand is to curtail unnecessary importations or unnecessary demand for foreign exchange. We want foreign exchange that we would use to get something in that would impact on the economy positively. So, we don’t want, demands that are so frivolous or are just for store of value.

You want to dollarise the economy, you just take some dollars and keep at home. We don’t want those speculative use of foreign exchange and so those we must manage with some of our administrative tools, we use them to address that. But to say that we can meet 100 per cent of the entire demand of the economy, including the ones that are genuine, those that reflect and impact positively on the economy, no bank in the world can meet that. But genuine demands that are important and have credible documentations, definitely would be met.

Where does the over 6,000 BDCs in Nigeria go from here?

They are still there, since we didn’t ban the BDCs. We didn’t revoke the BDCs’ licenses. However, the Governor also added that all other BDCs applications that are being processed at whatever stage that they are in, the processing of those licences have stopped and those ones that have the liberty to ask for refund which is the option available and the bank has also set out procedure to do that refund. The Financial Policy and Regulation Department has already made that public and the bank has assured anybody that is in that process to get his refund within three days of application. So, we don’t expect to see any issues around that side.

However, existing BDCs that already have licence, they are still valid businesses licenced by the central bank and what is just different now is that they won’t be getting foreign exchange from the central bank. If they are able to secure their funding for BTAs and PTAs they would remain in business, but they will still operate within the specifications of their licence.

Will the action have any impact on the currency inflows via diaspora remittances which comes through the International Money Transfer Operators(IMTOs)?

I don’t think so in the terms of having negative impact on inflows. That is because substantially those inflows that come into the system through IMTOs are not being obtained at a BDC rate. Rather, people collect that from the IMTOs or from the banks and go and resell at BDC windows for higher prices and then take the naira as their gains.

But now you only have that window, so you don’t have that market for arbitrage that would be incentivising people to go into round tripping. So, expect the inflows to keep coming, because the inflows are meant for certain purposes particularly the remittances for families and for other businesses that people have here. That is because when prices are reasonable, inflation will come down, people have jobs, other things are functioning you don’t even need those excesses gains to go into those hot corners and stuff like that. So, you have the value for what you’re getting. There’s a price you get for the foreign exchange that comes in which is common all over the system. You don’t see another very high price somewhere, that you have the incentive to say, let me take from this market and go to that market, you see that the difference is just N1 or N2.

Doing those connections that are sometimes very costly for you and could also be risky, in terms of you losing your funds.

Getting back to the banks that are going to most likely handle more customers using their window and their bank branches, won’t that be an additional pressure on the central bank in terms of monitoring and policing the system to ensure that the banks do the right thing?

Well, for the banking system and I am talking of the deposit money banks, the central bank has a very robust monitoring system both the automated one and also the banking supervision side of it as well as the examination side. The banks are just 26 banks in the country. It’s different from 5,000 institutions that you need to inspect their books, even the books then of the BDCs mostly are manual, and they are not on the automated platform. But for the commercial and merchant banks, we see what is going on there on daily basis and every second.

We have electronic platforms where we monitor, our examiners know what is going on in the banks, we can do targeted examinations within hours, people can go to the banks call for their books and you have those books because it’s mandatory for them to have those books, the renditions are daily. We have platforms where banks make renditions at the end of every day; we also have tools to penalise banks heavily when they deviate and refuse to comply with our standards and it comes to them at a very high cost. So, it’s not like BDCs that just have a requirement of N35 million and then you can walk away and commit a crime of N100 million and you let go. For the banks, because of what is at stake and then the central bank also has a robust mechanism to monitor those banks and also to deal with infractions. So, on that basis we are good.

The allegations of those malpractices announced by the Governor were too heavy to be ignored. Tell us more about them and what additional surveillance or monetary measures is the central bank putting in place on this?

Some of those allegations are actually things that the central bank has engaged the necessary authorities to address and this is not the first time the Governor is saying it. He has spoken at several past Monetary Policy Committee (MPC) meetings of issues around corruption, money laundering going on in the BDC segment particularly during heavy political period. And you see those reflecting in the behavior of prices in those markets, and we also see other illicit activities that are going on there. The bank has raw data and information on this and they are collaborating with the necessary investigation and security agencies in dealing with this and the collaboration is still on going and very soon you will also hear from the bank how some of these agencies are also dealing with the cases.

You have heard of several cases by the EFCC where some transactions were traced to BDCs and people are arrested.

What is likely to change in terms of your monetary policy focus at the central bank and action between now and 2022?

For the monetary policy side of things, in the last communique, we mentioned how things are tapering down positively in terms of the inflation numbers, coming down for two consecutive months, GDP numbers going up for two consecutive quarters now. Whilst, the projections are that it would improve for the third and fourth quarters of 2021 into 2022.

Indeed the monetary policy stance is expansionary. However, the hold that we have now was for the policies that have been put in place since we had the pandemic, particularly from the second quarter of 2021 which included the fiscal and monetary stimulus so that the injections that got into the economy can permeate more in terms of creating more jobs, in terms of speeding up the recovery of the economy to reflate the economy back to its pre-pandemic growth rate and beyond, the Governor mentioned that for as long as our GDP is still below our population growth rate, we are still not out of the woods yet.