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In major policy shift, CBN cancels N2.3 trillion forex sales to BDCs

Economists and financial experts interviewed by Daily Trust expressed mixed feelings about the new policy and its immediate and long term implications.

The Central Bank of Nigeria (CBN), on Tuesday, announced the cessation of forex sales to Bureau De Change (BDCs) operators.

CBN Governor, Godwin Emefiele, who disclosed the new policy after the July 2021, Monetary Policy Committee (MPC) meeting in Abuja, said the apex bank was funneling $5.7 billion (about N2.346 trillion) annually through the BDCs.

He said the $5.7bn allocated to BDCs has become unsustainable as $20,000 is allocated to over 5,500 BDCs in the country, amounting to $110 million per week.

Economists and financial experts interviewed by Daily Trust expressed mixed feelings about the new policy and its immediate and long term implications.

They predicted a shock that will further shot up the dollar rates at the parallel market, which will stabilise in the long run. They also blamed the CBN for the downside of the expunged practice.

Emefiele also said the CBN will no longer continue registration of new BDCs as subsequent forex will be channelled through commercial banks.

The CBN governor said as part of the new forex sales policy, all commercial bank branches will create a separate desk for the purpose.

“The BDCs were regulated to sell a maximum of 5,000 dollars per day, but CBN observed that they have since been flouting that regulation and selling millions of dollars per day.

“The CBN also observed that the BDCs aid illicit financial flows and other financial crimes.  The bank has thus decided to discontinue the forex sales to BDCs with immediate effect.

“We shall, henceforth, channel all forex allocation through the commercial banks,” he said.

The apex bank head also urged banks to ensure that every deserving customer got their forex demand adding that any bank found circumventing the new system would be sanctioned.

“Once a customer presents all required documentation to purchase forex, the commercial banks should ensure they get the forex. Any customer that is denied should contact the CBN on 0700385526 or through the email- [email protected]

In another development, during the MPC press briefing, the CBN governor said the apex bank has continued to rev up interventions in the real sector to spur economic growth.

The CBN governor said the MPC meeting retained all existing monetary rates.

Other policies, interventions

Emefiele said “Under the Bank’s development finance initiatives, the Bank granted N756.51bn to 3,734,938 smallholder farmers cultivating 4.6m hectares of land, of which N120.24bn was extended for the 2021 Wet Season to 627,051 farmers for 847,484 hectares of land, under the Anchor Borrowers’ Programme (ABP).”

He further stated that under the “Agribusiness/Small and Medium Enterprise Investment Scheme (AGSMEIS), the sum of N121.57bn was disbursed to 32,617 beneficiaries, and for the Targeted Credit Facility (TCF), N318.17bn was released to 679,422 beneficiaries, comprising 572,189 households and 107,233 Small and Medium Scale Enterprises (SMEs).”

Similarly, “Under the National Youth Investment Fund (NYIF), the Bank released N3bn to 7,057 beneficiaries, of which 4,411 were individuals and 2,646 SMEs. Under the Creative Industry Financing Initiative (CIFI), N3.22bn was disbursed to 356 beneficiaries across movie production, movie distribution, software development, fashion and IT verticals.”

Under the N1tr Real Sector Facility, Emefiele said “The Bank released N923.41bn to 251 real sector projects, of which 87 were in light manufacturing, 40 in agro-based industry, 32 in services and 11 in mining.

“On the N100bn Healthcare Sector Intervention Facility (HSIF), N98.41bn was disbursed for 103 healthcare projects, of which, 26 are pharmaceuticals and 77 are in the hospital services.”

He also said, “The sum of N232.54m was disbursed to five beneficiaries under the CBN Healthcare Sector Research and Development Intervention (Grant) Scheme (HSRDIS) for the development of testing kits and devices for COVID-19 and Lassa fever.”

N156bn for meters, DisCos

On the National Mass Metering Programme (NMMP), he said, “N36.04bn was disbursed to 17 Meter Asset Providers, to nine Distribution Companies (DisCos), for the procurement and installation of 657,562 electricity meters.”

On the Nigerian Electricity Market Stabilisation Facility – 2 (NEMSF-2), he said CBN released N120.29bn to 11 DisCos, to provide liquidity support and stimulate critical infrastructure investment needed to improve service delivery and collection efficiency.

The CBN also reiterated concerns around the heightened insecurity which is impacting food supply and prices.

“The MPC was concerned about the broad level of insecurity across the country, noting its impact on business confidence and overall economic activities.”

It also noted the persisting insecurity in key commodity producing areas and urged the federal government to intensify security surveillance in farming communities to ensure uninterrupted farming activities.

Mixed reactions

Experts in the financial sector have expressed mixed feelings to the decision to cancel the issuance of forex to the parallel market.

A professor of Finance and Capital Market, Prof Uche Uwaleke, said the action by CBN stopping forex sales to BDCs is in the right direction but might also have repercussions on naira value.

“The decision by the CBN to stop forex sales to BDCs has merits and demerits. Having said that, I think it is in the best interest of the Nigerian economy” he said.

On the positive side, he said “It is consistent with the move by the CBN to unify exchange rates and bring more transparency to the forex market.”

He said: “Exchange rate unification is in line with the IMF and World Bank’s recommendations and so improves the country’s profile and credit standing before International financial institutions.

“It signifies that the country is serious in her reform efforts.”

He noted that the action “Will slow down the rate of depletion in external reserves.”

Prof. Uwaleke said: “The move is likely to check round-tripping of forex and reduce the supply of forex in the parallel market.”

Further, he noted that “Speculative demand for forex is also likely to reduce. I am aware that BDCs have been accused of being vehicles for bribery and corruption. This will likely be reduced.”

On the flip side, he said “This measure will wipeout the employment opportunities created in the sector with over 5000 BDCs with several others waiting to be licensed”.

“Also, the gap between the AFEX rates and parallel market rates is likely to widen further with dollar shortages in BDC and parallel market segments” he said.

“Going forward, the CBN should ensure that purchase of forex via the banks, which will now increase is made stress-free with minimal documentation. This is what pushes people to the parallel market” he advised.

Managing Director of Kairos Capital Limited, Sam Chidoka said: “I guess what the CBN is doing is to ensure that the retail customers get more of the intervention because there are a few banks compared to the large number of BDCs.

“The immediate effect is the slight rise in the parallel market rate because of the shock of this announcement to the system.

“But knowing that these banks have branches across the country, it is only a matter of time before the operations become stabilised.”

The Chief Consultant of indigenous business management consulting firm, B. Adedipe Associates Limited (BAA Consult), Dr Biodun Adedipe while speaking with Daily Trust said: “It is an aberration for the CBN to be selling dollars to bureau de change.

“When we started it as a concept in Nigeria, the idea was for operators of bureau de change to source foreign currencies on their own. In which case, you can only source what you can sell in the market.

“But today, over the course of time, we have changed the bureau de change as an outpost for foreign currencies, similar to participating banks in the official window.

“As a participating bank, you get allocation and someone who runs a BDC and has a license also gets allocation without doing any marketing.”

Commenting, analysts at Cordros capital said: “In the short-term, we expect the new development to lead to further pressure on the exchange rate in the parallel market given the (1) lag between commercial banks settling to adjust to the CBN’s directive and (2) knee jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure.

“Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates.”

On his part, Dr. Bongo Adi an Economist and Senior Lecturer at the Lagos Business School said there is nothing that assures us that the CBN is serious about its decision as this could be another smokescreen.

He noted that the CBN created the opportunity for the proliferation of the market. “You have the banks and other financial institutions yet you encourage BDCs. That has created a lot of problems for the economy” he noted.

However, he observed that it is also never easy to access forex through official sources and this has sort of given impetus to the BDCs.

Dr Adi said the BDCs will continue to be in business as they would access forex from other sources but a significant number of BDCs would be shut down as most of them rely more on the CBN allocations.

He said the local market demand for forex will not be enough to service the over a thousand BDCs across the country.

ABCON mum on new decision

The National President of Association of Bureau De Change (ABCON), Aminu Gwadabe did not respond to calls and text messages when Daily Trust contacted him for a reaction to the CBN’s latest decision.

However, in an earlier interview with Daily Trust, Gwadabe had argued that If Nigeria is to achieve a stable exchange rate, then the BDC operators must be given room to operate in the country.

He argued that “The BDCs have the network and distribution capacity, the convenience, potency and ability to serve the critical retail segment of the economy. If you want to buy $300, the banks may not look your way, which is why you need BDCs around you”.

Gwadabe explained that the banks are not supposed to be the primary market operators in the forex market, as it distracts from either creating deposits or giving out loans, which is their traditional role in the economy.

“Go to India, BDCs provide nothing less than $30 billion to them through remittances alone.

“Algeria also has a strong inflow of diaspora remittances. In the United Arab Emirate, the BDCs in Dubai alone provide the foreign currency cash needed by banks,” he said.

“Go to Lebanon, their economy is highly dependent on the activities of BDCs as a result of diaspora remittances and all these things are packaged and rooted through the operations of BDCs and banks are not even involved,” he had said.

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