Naira Sinks to 285/Dollar, CBN stops Forex Sale to BDCs

The Central Bank of Nigeria on Monday stopped the sale of foreign exchange to all the 2,786 licensed Bureau De Change Operators across the country.

The ban was announced by the CBN Governor, Mr. Godwin Emefiele, at a special media briefing held at the bank’s headquarters in Abuja just as the naira traded at 285 against the dollar at the parallel market on Monday from 278 on Friday.

He said with the decision, the CBN would no longer provide foreign exchange to the BDCs, adding that henceforth, all BDC operators must source for foreign exchange from autonomous sources.

The governor said any BDC operator that was not satisfied with the central bank’s decision should return their operational licence to the CBN and ask for the refund of their N35m deposit.

Emefiele said Nigeria was the only country in the world where the central bank would provide the BDC operators with foreign exchange, adding that with the continued depletion of the foreign reserves, such funding was no longer sustainable.

For instance, the governor said that between July 2014 and January this year, the country’s external reserves had suffered a great pressure from speculative attacks, round-tripping and front-loading activities by actors in the foreign exchange market.

These, he noted, had led to a decline in the reserves from $37.3bn in June 2014 to $28bn currently.

Emefiele lamented that due to the speculative attack on the nation’s currency, the central bank’s monthly foreign earnings had fallen from a high of $3.2bn to as low as $1bn monthly.

He lamented that while the country’s reserves were declining, the average food import bill was witnessing a steady increase from N148.3bn per month in 2005 to an average of N917.6bn in the first nine months of 2015.

Emefiele said following the ban on the sale of forex to the BDCs, the central bank had decided to remove the restriction placed on cash deposits into domiciliary accounts.

This implies that commercial banks in the country are now free to accept foreign exchange cash deposits from their customers.

“Following the drop in crude prices from a peak of $114 barrel in July 2014 to as low as $33 per barrel in January 2016, the country’s reserves have suffered great pressure from speculative attacks, round-tripping and front-loading activities by actors in the foreign exchange market.

“This fall in oil prices also implies that the CBN’s monthly foreign earnings has fallen from as high as $3.2bn to current levels of as low as $1bn. Yet, the demand for foreign exchange by mostly domestic importers has risen significantly.”

He added, “In view of the above, the management of the Central Bank of Nigeria has reached the following decision, which takes immediate effect. The bank will, henceforth, discontinue its sale of foreign exchange to the BDCs. Operators in this segment of the market will now need to source their foreign exchange from autonomous sources.

“They must, however, note that the CBN will deploy more resources to monitoring these sources to ensure that no operator is in violation of our anti-money laundering laws. The bank will now permit commercial banks in the country to begin accepting cash deposits of foreign exchange from their customers.”

Emefiele said the decision to discontinue the sale of foreign exchange to the BDCs was arrived at following emerging evidences that the BDCs had abandoned their primary mandate of meeting the forex demands of retail users thereby, turning themselves into a channel of illicit cash flows.

The governor wondered why the forex market had yet to stabilise despite all measures that were earlier put in place by the central bank to avoid further depletion of the reserves.

Rather than help to achieve the objectives for which they were licensed, Emefiele said the BDCs were involved in rent-seeking, which led to widening margins and profits from the foreign exchange market.

He said given this rent-seeking behaviour, it was not surprising that since the CBN began to sell foreign exchange to the BDCs, the number of operators had risen from 74 in 2005 to 2,786 currently.

In addition, he said the CBN was receiving close to 150 new applications for the BDC licences every month, adding that more disturbing was the financial burden being placed on the bank and the nation’s limited foreign exchange.

He said, “The CBN sells $60,000 to each BDC per week. This amount translates to $167m per week, and about $8.6bn 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 $28.4m depletion of the foreign reserves per week and $1.476bn per annum.

“This is a huge haemorrhage of our scarce foreign exchange reserves and cannot continue, especially because we are also concerned that the BDCs have become a conduit for illicit trade and financial flows.”

He said, henceforth, the CBN would prioritise foreign exchange for the most critical needs such as matured Letters of Credit from commercial banks; importation of petroleum products, critical raw materials, plants and equipment; and payment for school fees, Business and Personal Traveling Allowances.

He said contrary to insinuations that the CBN was not providing funds for some critical transactions, the bank had between June and December last year provided the sum of $288m to banks for payment of school fees abroad.

Emefiele said this amount, when spread over a one-year period, implied that a total sum of $600m was provided for school fees related transactions

For BTA and PTA, the governor said about $180m was provided to travellers between June and December 2015, thus translating into about $400m for a one-year period.

He said with the declining revenue from oil, which had impacted negatively on the nation’s reserves, there was a need for Nigerians to reduce the level of their overseas shopping.

Reacting to the latest developments, the acting President, Association of Bureau De Change Operators, Alhaji Aminu Gwadabe, said in a telephone interview with one of our correspondents that with the stoppage of dollar sale to the BDCs, the naira would be further devastated in the market, adding that it would increase activities in the ‘black market’.

He said the naira at the BDC segment of the forex market weakened to 285 against the dollar on Monday, from 278 on Friday, adding, “Once the sale to the BDCs is stopped, we will be looking at 350 to 400.”

Gwadabe noted that the BDC segment had an important role because it had contributed over N150bn as compulsory deposit to the CBN at just three per cent interest rate.

“This is a sector that provides nothing less than 25,000 employment opportunities and there is no country in the world where there is no official bureau de change. In fact, in Dubai, banks source their forex from the BDCs,” he added.

On where the BDCs would turn to for dollar supply, “Right now, people even travel to Ghana and other countries to source for dollars. Definitely, that is what will be happening because the banks are not allowed to sell.”

The Head of Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, is of the view that the ban on forex sale to the BDCs does not solve the problem regarding the pressure on the naira as it has not addressed the demand for the greenback.

A currency strategist at Ecobank Nigeria, Mr. Kunle Ezun, described the ban of forex sale to the BDCs as “double jeopardy and counter-productive,” but noted that the lifting of deposits into domiciliary accounts was a welcome development that would not have a major impact on the naira outlook.

Ezun said, “In the immediate, it will help to bring dollars outside the banking system in. The impact would have been significant if the CBN has said it will allow transfer out of the system.

“Today, the BDCs are a segment of the market and they just went through a recapitalisation process. The BDCs service a portion of the market that you can’t wish away. If today you say you are not selling to them, then who takes care of that portion of the market? This is another restrictive measure that will have a negative effect on the naira.”

by  Ifeanyi Onuba and ’Femi Asu