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As the nation awaits reversal of some monetary policy measures to save the naira and check money laundering, forex market stakeholders say that upward review of foreign exchange allocation to Bureau de Change (BDC) operators is the antidote to naira depreciation and the widening gap between the official and parallel market rates.
The stakeholders argue that the present weekly allocation of $50,000 from the Central Bank of Nigeria (CBN) to the BDC operators is inadequate and should be raised to $100,000, while the $250,000 from deposit money banks (DMBs) should be raised to $300,000.
“The divergence between the official and parallel markets had widened to N20 or 12 percent of the official exchange rate. The CBN is of the opinion that the Nigerian economy is more exchange-rate than interest-rate sensitive,” says Bismarck Rewane, chief executive, Financial Derivatives Company, in the current Economic Bulletin released yesterday. “Therefore, a depreciating currency will have a direct impact on inflation and could be counter-productive.”
Also, the stakeholders say that effective monitoring and supervision of banks by the CBN would check current abuses by banks capitalising on the supply shortage to charge beyond the one percent required by law, and subjecting BDC operators and other end-users to purchase the forex through domiciliary accounts for extra charges.
They also recommend that other bottlenecks typified by unnecessary documentation under the current Retail Dutch Auction System (RDAS) that are making end-users to resort to the black market to meet customers’ expectations should be eliminated by the CBN.
“There is need for the CBN to check the activities of the black market operators, either through integration or training, to educate them on the dangers of their activities on the economy,” says Mohammed Gwadabe, president, Association of Bureaux de Change Operators of Nigeria (ABCON).
“The current weekly allocation of $50,000 to BDCs is inadequate and therefore is contributing to shortage in the forex market, while also efforts should be intensified by the CBN in checking the malpractices by banks.
“The banks apart from frustrating the efforts of the CBN on forex transactions, also flouts them by either refusing to sell $250,000 to BDCs, or by making it mandatory for the operators to purchase through domiciliary accounts to attract extra charges. This then exceeds the one percent maximum margin required by CBN,” he adds.
Usoro Essien of Associated Discount House Limited, says the growing premium between the official and parallel markets can be traced to a bottleneck at the official window, effectively goading ‘some’ legitimate demand to the BDC market.
According to him, “The development escalated following the re-introduction of the RDAS at the official window, as the auction process employs a lot more scrutiny than the WDAS, thereby slowing transaction speed. In my opinion, the regulator could narrow the spread between markets by identifying and redirecting eligible demand from the parallel market back to the official or interbank and fast-tracking transaction speed.”
Johnson Chukwu, chief executive, Cowry Asset Management Limited, says the most viable solution to the widening gap between the official exchange rate and the parallel market rate, is for the Central Bank to allow the official rate to depreciate to the level of the parallel rate, which mirrors the equilibrium price of the dollar.
“The other option,” he adds, “is for the Central Bank and the Debt Management Office to increase the yields on Federal Government Treasury Bills and FGN bonds so as to attract more inflows from foreign portfolio investors. This will however impose a higher funding cost on the Federal Government, as well as increase Nigeria’s international payment risk.”
To complement the monetary measures, analysts are challenging government to make use of numerous agencies at the borders to checkmate illegal importation of some items, like 100 percent tariff on rice, or ban on importation of furniture, as importers of these products resort to parallel market to source dollars for their imports and then smuggle the products through the porous borders.
Absence of fiscal buffers, typified by dwindling foreign reserves and Excess Crude Account (ECA), they argue, has continued to increase the country’s reliance on portfolio flows, thus constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price.
“The spread between the interbank and street rate was driven further apart by the policies introduced by the CBN in October 2013. Two key components of this policy include a Know Your Customer (KYC) policy at the BDC and the replacement of the WDAS with the RDAS system,” say analysts at Afrinvest.
“We believe the CBN introduced these policies to prevent the dollarisation of the economy, regulate the flow of dollar trades and prevent arbitraging by ‘ingenious banks’ in the system. Consequently, we believe this policy will be accompanied by short-term pains, i.e., depreciation of the naira. However, there are numerous long-term benefits to the economy that will soothe the pain,” they add.
Sanusi had said at the post-Monetary Policy Committee (MPC) meeting briefing that gross external reserves as at December 31, 2013 stood at $42.85 billion, representing a decrease of $0.98 billion or 2.23 percent, compared with $43.83 billion at end- December 2012.
He also said the decrease in the reserves level had resulted largely from a slowdown in portfolio and FDI flows in Q4:2013, leading to increased funding of the foreign exchange market by the CBN to stabilise the currency.
The governor also said that the inter-bank selling rate opened at N156.25/US$ and closed at N159.90/US$, representing a depreciation of N3.65k or 2.34 percent for the period. However, at the BDC segment of the foreign exchange market, the selling rate opened at N159.50/US$ and closed at N172.00/US$, representing a depreciation of N12.50k or 7.84 percent.
By: John Omachonu
