Nigeria: Ending FX Sale to BDCs Disrupts ‘Juiciest Economic Racket’: Analyst

By putting an end to the sale of foreign exchange (FX) to Bureau De Change (BDC) operators, Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has “disrupted one of the juiciest gravy trains in the Nigerian economic racket,” Financial Derivatives Company Limited (FDC) has stated.

However, the naira depreciated to N525 to a dollar on Wednesday on the parallel market, lower than the N505 to a dollar it traded on Tuesday after the central bank announced its discontinuation of FX sale to BDCs. But on the Investors and Exporters’ (I & E) window, the naira exchange rate against the dollar closed at N411.60 to a dollar at the close of market yesterday, compared with the N411.50 to a dollar it closed the previous day.

FDC, a Lagos-based financial advisory and research firm, stressed, “Even though BDCs are licensed by the CBN, the point had been reached where the programme was no longer tenable and surely not sustainable.”

It stated that Nigeria was spending more on BDCs than debt service.

The firm wondered how a country whose total exports and receipts were approximately $59.8 billion, was spending $5 billion to subsidise “supposed Nigerian tourists during a COVID-19 year.

“In other words, spending more on tourism rather than debt servicing. Therefore, the structure of the forex market needed sanitisation,” the firm headed by Mr. Bismarck Rewane added.

Nonetheless, recommending solution to the problem, it stated, “The interim solution of substituting BDCs with banks is hardly going to achieve much. You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats.”

It recommended, instead, that the CBN should allow banks to retail dollars as they had done in the past and make BDCs engage in retailing same but at a buy rate different from today’s subsidised rate.

That is, the BDCs would be allowed to buy dollars from the CBN at the parallel market rate less a N10 premium, the research company stated.

It said, “For example, if the parallel market rate is N500/$, the purchase rate from the CBN will be N490/$. If the BDCs sell at N550/$, the CBN increases its rate for BDCs to N540/$.

“That will be the same retail rate at the banks. This eliminates the arbitrage corridor and abuse. It will certainly reduce the demand for dollars and it must coincide with an increase in dollar supply from the CBN. This way, the naira will appreciate towards the ever elusive fair value or the REER (Real Effective Exchange Rate), which today is anywhere between N470 and N490/$.”

In his own contribution, Chief Executive Officer, CFG Advisory, Adetilewa Adebajo, said the immediate market reaction was a parallel market spike.

Adebajo said, “It should be noted that BDCs were set up to serve retail markets with transactions under US$5,000. But this might not be sustainable, as consumers did not benefit from the official rates BDCs were given as they engaged in arbitrage with the parallel markets.

“This situation offers the banks an opportunity to create a viable FX interbank market with transparent bid and offer rates that Nigerians can access via the existing inter-banking platforms.

“How long this will last is yet to be seen, as we recall that CBN last year for separate reasons suspended sales to BDCs and resumed several months later.”

Emefiele had disclosed the end of FX sale to BDCs while briefing journalists at the end of a two-day meeting of the Monetary Policy Committee (MPC) in Abuja on Tuesday. He directed all commercial banks to immediately create designated branches for the sale and disposal of FX to customers who deserved it for legitimate purposes.

The CBN governor said the apex bank will no longer process or issue new licences for BDC operation in the country, adding that all licences being currently processed, regardless of the stage, had been suspended. He said the CBN would now channel weekly FX allocations hitherto meant for BDCs to commercial banks.

Emefiele said commercial banks were now permitted to begin accepting FX cash deposits from their customers. He explained that the measures were to ensure that the apex bank was better able to carry out its mandate in an effective and efficient manner as well as to guarantee preservation of the commonwealth and financial system stability.

Emefiele said the decision to eliminate the BDC operators from the FX market was necessitated by their dubious and unwholesome practices, adding that the operators have gone beyond their primary role of being retail dealers of FX to becoming wholesale dealers.

The CBN governor stated that rather than catering for the retail users, who required about $5,000 to meet their FX needs, BDCs now transacted in millions of dollars. He said BDCs bought dollars from the CBN at N197 and sold to their customers at N250.

Emefiele said it was no wonder that BDCs had risen “from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licenses every month.”

Obinna Chima and Nume Ekeghe

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