The Central Bank of Nigeria came out of its 137th monetary policy meeting with a declaration to discontinue the supply of FX to Bureau De Change operators (BDCs). According to CBN helsman Godwin Emefiele, the move became necessary so as to clampdown on illegal activities of BDC operators.
Emefiele emphasized that the main problem with the BDC operators was that they continually create artificial FX scarcity in a bid to seek “abnormal” profits thus introducing risks to the Nigerian financial system.
He further noted several behaviours which were unhelpful to CBN’s price stability objectives such as rent-seeking BDC operators only interested in large margins, dollarization of the Nigerian economy, subversion of the cashless policy, common ownership of several BDC by the same owners to obtain multiple FX, and ‘regrettably’ international organization and embassy patronage of illegal FX dealers.
The new policy has expectedly been received with mixed reactions with varying degrees of concern regarding its likely impact on the Nigerian economy.
Angel News spoke with some financial experts to assess the likely impact of this impromptu action from CBN.
According to Amobi Qsac, a chartered accountant, “the most pressing implication would be the immediate reduction in the number of retail outlets for the supply of dollars coupled with more logistical issues which are likely to create a semblance of scarcity unless the banks can automate the way FX requests are handled.
Emefiele rightly said that there are over 5,000 BDCs, this is in addition to the various bank branches all supplying FX to Nigerians. What this means is that since the BDCs are out of the picture now, the pressure will now be on the existing bank branches to meet the uptick in footfall.
In other words, bank branches will experience a sharp rise in demand from customers as orders previously placed with BDCs now get re-routed to Bank tellers/ FX desks who will need to be adequately staffed to cope with the increased retail administration required. Therefore, clients should expect to experience some inconvenience as they place FX orders and go to pick them up from their branch.
The CBN will need to move fast to smoothen out administrative bottlenecks, as the ban is posed to create supply-chain challenges that may aggravate the FX crises.
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Dr. K. K Ossai opined that the move is the right one and was long overdue. He however, frowned at the timing, stressing that execution of this directive/policy/announcement by the CBN, may expose huge gaps that could create unintended consequences.
As a baseline, Nigerian banks have the branch network to facilitate retail FX sales and with the advent of mobile technology, the usefulness of BDCs to the economy is immaterial. In other words, the BDCs are providing a service that banks can easily subsume.
Therefore, redirecting transactions to bank branches instead of the BDCs should not cause any long-term ripples. Though there are two caveatsbto it:
The first caveat is timing. This is the beginning of the summer holidays when covid-related travel restrictions have been eased so we expect an increase in demand by retail users for FX which the banks now need to deal with.
The second caveat is perception. There is already an FX squeeze where many consumers have been in queues waiting for FX supply and so the market sentiment is skewed against the Naira.
Apparently, this is not the first time the central bank is banning Bureau De Change operators in Nigeria. In January 2016, the Godwin Emefiele led central bank also banned the BDCs for similar acts.
Let’s examine briefly the effect of same ban 5 years ago;
On the 11th of January 2016, when the CBN banned BDCs, the exchange rate was N268/$1.
By 31st December 2016, the exchange rate had depreciated to N495/$1. See this Nairametrics article at the time for reference.
Devaluation was effectively 46% while the dollar had gained a whopping 85% against the naira.
Meaning if you held $100 in January 2016 when the CBN banned BDCs it was worth N26,800. But by December 31st 2016, that same dollar was worth N49,500.
Should 2016 repeat itself, the following will ensue;
As of July 27th 2021, when CBN banned BDCs, the exchange rate was N500/$1.
If it depreciates by 46% as it did in 2016 then we could be looking at a whopping exchange rate of N925/$1 by December 2021.
This will be unprecedented in the history of Nigeria and will surely increase the prices of goods and services across the country.
There is a risk that the impact of the announcement will be exaggerated and if market participants perceive this as a negative for supply, it could induce panic and drive rates up in the immediate term. Ideally, the CBN’s announcement to re-direct FX supply to banks rather than BDCs should have been preceded by CBN increasing supply to banks to bolster confidence and therefore, dampen the panic effect of the announcement.
From our findings, most analysts agreed that the elimination of the BDCs should NOT be a major cause for alarm if the CBN and banks can get their acts together to ensure this announcement does not create administrative bottlenecks or cause panic buying. Albeit, that the elimination of BDCs may not be the silver bullet to halt the ongoing decline of the Naira which is partly attributable to ongoing FX supply issues in the overall economy.
Banning the BDCs for nefarious activities might be a move in the right direction however, if history is to serve as a guide, the CBN will need to ensure there is availability of forex at all markets especially the I&E window.
The reason for the challenge we have in the country still remains the lack of dollar supply in the economy. Foreign investors no longer import dollars into the country and oil revenue is still as bad as it was towards the end of last year.
This is probably the best time for the central bank to float the naira or adopt a more market driven approach that allows traders determine the exchange rate at which they want to buy and sell dollars. The CBN can continue to play its interventionist role by stepping in with supply when the price moves away from its guidance. Anything short of this could well lead Nigerian into a repeat of 2016
Deconstructing CBN’s ban on sale of forex to BDCs, Implications for the Naira
