The Central Bank of Nigeria has ended the regime of selling foreign exchange to bureau de change in order to stop the depletion of the scarce foreign exchange reserve
THE Central Bank of Nigeria, CBN, has discontinued its sales of foreign exchange to operators of Bureau de Change, BDCs, in Nigeria in its bid to stop the depletion of the foreign reserve which has been on the decline following the dwindling revenue from crude oil. This new policy was announced in Abuja on Monday, January 11, by the management of the CBN. According to the CBN, operators in this segment of the market would now need to source their foreign exchange from autonomous source. They must, however, note that the CBN would deploy more resources to monitoring these sources to ensure that no operator is in violation of our anti-money laundering laws.
The apex bank would now permit commercial banks in the country begin accepting cash deposits of foreign exchange from their customers. According to CBN, “these measures are not intended to be punitive on anyone or any group. Rather it is meant to ensure that the CBN is better able to carry out its mandate in an effective and efficient manner, which guarantees preservation of our scarce commonwealth, and that our hard-earned financial system stability remain intact to the benefit of all Nigerians.”
The CBN’s decision came in the wake of drop in crude prices from a peak of $114 barrel in July 2014 to as low as $33/barrel in January 2016. Nigeria’s reserves suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the Forex market. This fall in oil prices also implies that the CBN’s monthly foreign earnings has fallen from as high as $3.2 billion to current levels of as low as $1 billion. Yet, the demand for foreign exchange by mostly domestic importers has risen significantly. For example, the last Nigeria had oil prices at about $50 per barrel for an extended period of time was in 2005. At that time, the country’s average import bill was N148.3 billion per month.
“In stark contrast, our average import bill for the first nine months of 2015 is 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 $37.3 billion but has declined to around $28.0 billion as of today,” Godwin Emefiele said at a press conference on Monday in Abuja..
To avoid further depletion in the reserves, the CBN took a number of countervailing actions including the prioritization of the most critical needs for foreign exchange. In this regard, and in order of priority, CBN decided to provide the available but highly limited foreign exchange to meet the following needs: Matured Letters of Credit from Commercial Banks, importation of Petroleum Products; Importation of critical Raw Materials, Plants, and Equipment, and payments for School Fees, BTA, PTA, and related expenses
According to CBN, “in total disregard of the difficulties that the bank is facing in meeting its mandate of maintaining the country’s foreign exchange reserves to safeguard the value of the Naira, we have continued to observe that stakeholders in some of the subsectors have not been helpful in this direction. 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 US$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 numbers, BVNs, boarding passes, and flight tickets to render weekly returns to the CBN.
“Despite the fact that Nigeria is the only country in the world where the Central Bank sells dollars directly to BDCs, operators in this segment have not reciprocated the Bank’s gesture to help maintain stability in the market. Whereas the Bank has continued to sell US Dollars at about N197 per dollar to these operators, they have in turned become greedy in their sales to ordinary Nigerians, with selling rates of as high as N250 per dollar. Given this rent-seeking behaviour, it is not surprising that since the CBN began to sell foreign exchange to BDCs, the number of operators have 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.”
Rather than help to achieve the laudable objectives for which they were licensed, the Bank has noted the following unintended outcomes: avalanche of rent-seeking operators only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates; potential financing of unauthorized transactions with foreign exchange procured from the CBN; gradual dollarization of the Nigerian economy with attendant adverse consequences on the conduct of monetary policy and subtle subversion of cashless policy initiative; and prevailing ownership of several BDCs by the same promoters in order to illegally buy foreign currencies multiple times from the CBN.
More disturbing though, is the financial burden being placed on the Bank and our limited foreign exchange. The CBN sells $60,000 to each BDC per week. This amount translates to $167 million per week, and about $8.6 billion per year. In order to curtail this reserve depletion, CBN has reduced the amount of weekly sales to $10,000 per BDC, which translates into $28.4 million depletion of the foreign reserve per week and $1.476 billion per annum. “This is a huge hemorrhage on our scarce foreign exchange reserves, and cannot continue especially because we are also concerned that BDCs have become a conduit for illicit trade and financial flows,” the CBN said.
– Jan. 11, 2015 @ 9:50 GMT |