FX Market: Buhari Either Going Backwards Or Nowhere
The Central Bank of Nigeria (CBN) is set to resume dollar sales to Bureaux de Change (BDC) in a bid to arrest the continued depreciation of the Naira in the parallel foreign exchange market as well as reduce opportunity for round-tripping.
Investigations revealed that the CBN, held a meeting recently with the leadership of Association of Bureau de Change Operators of Nigeria (ABCON), the umbrella body of BDCs in the country where the CBN reportedly informed ABCON leaders that it would soon resume dollar sales to them.
ABCON President, Alhaji AminuGwadabe, who confirmed this to newsmen, said: “We just held a meeting with the CBN and they informed us that they would soon resume dollar sales to BDCs.” He said the apex bank also promised to create additional windows for BDCsto access foreign exchange but that details and criteria would be announced later. He said: “We also assured them that we would ensure that BDCs abide by the criteria as well as comply with all regulatory requirement to justify the renewed confidence in the sub-sector.”
Acting Director, Corporate Communications, CBN, Mr. Isaac Okorafor, however, could not confirm this development to Vanguard. He said: “I’m not aware of such a meeting or any plan to resume dollar sales to BDCs.”
Why the CBN suspended dollar sales to BDCs
The CBN, on Monday, January 11, 2016, suspended dollar sales to BDCs due to decline in the country’s foreign exchange earnings, and sharp practices by BDCs. CBN Governor, Mr. Godwin Emefiele, had said: “This fall in oil prices also implies that the CBN’s monthly foreign earnings have fallen from as high as US$3.2 billion to current levels as low as US$1 billion.
“Yet, the demand for foreign exchange by mostly domestic importers has risen significantly. For example, the last time we had oil prices at about US$50 per barrel for an extended period was in 2005.
“At that time, our average import bill was N148.3 billion per month. In stark contrast, our average import bill for the first nine months of 2015 was N917.6 billion per month, even though oil prices are now less than US$35 per barrel.
“The net effect of these combined forces, unfortunately, is the depletion of our foreign exchange reserves. As of June 2014, the stock of Foreign Exchange Reserves stood at about US$37.3 billion but has declined to around US$28.0 billion as of today.
“In particular, we have noted with grave concern that Bureau de Change, BDC, operators have abandoned the original objective of their establishment, which was to serve retail end users, who need $5,000 or less. Instead, they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction. Thereafter, they use fake documentations like passport.”
Why the CBN is resuming dollar sales to BDCs
The decision to resume dollar sales to BDCs must have been influenced by the need to reduce opportunity for round tripping of foreign exchange by closing the gap between the interbank and parallel market exchange rate, which widened, yesterday, following further depreciation of the naira in the parallel market.
At the close of trading, yesterday, the parallel market exchange rate rose to N355 per dollar from N351 per dollar on Monday, indicating N4 or 1.1 per cent depreciation. Two weeks ago, the parallel market exchange rate had fallen upon announcement of the details of the CBN flexible exchange rate regime. From N369 per dollar on Tuesday, June 16, 2016, when the CBN announced details of the new exchange rate regime, the parallel market exchange rate fell steadily, reaching N345 last Tuesday due to panic reaction at the commencement of the revived interbank foreign exchange market.
The parallel market exchange rate, however, resumed its upward movement last week due to demand pressure and dearth of dollar supplies, reaching N351 per dollar at the close of business last Friday.
However, the Naira had remained relatively stable at the interbank market. Apart from the sharp depreciation in the first day of trading on Monday, June 20, 2016, when the interbank exchange rate rose from N197 to N281.85 per dollar, the Naira had remained below N285 per dollar in the interbank market.
This, however, resulted a widening of the gap between the interbank exchange rate and the parallel market exchange rate. The gap between the two exchange rates rose from N60.57 per dollar on Tuesday, June 21, 2016 to N72.68, yesterday. This development implies increased incentive for round-tripping of foreign exchange from the interbank market to the parallel market. A CBN investigation in 2002 had found 21 banks guilty of foreign exchange round-tripping, leading to the imposition of sanctions, including a one year suspension of the banks from the foreign exchange market.
Naira depreciates to N282.32 in interbank
Meanwhile, the Naira suffered marginal depreciation in the interbank foreign exchange market, yesterday, as the interbank exchange rate for sport transactions rose to N282.32, indicating 84 kobo depreciation for the Naira. On Monday, the Naira depreciated by 35 kobo for spot transactions while remaining stable for futures transactions. Consequently, the Naira has depreciated by N1.18 or 0.4 per cent in the interbank market this week.