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Nigeria: All Eyes On Banks As New Policy On Forex Takes Effect Monday

nigeria all eyes on banks as new policy on forex takes effect monday

– … as analysts weigh the pros and cons of new policy

By the time Nigerian foreign exchange users approach their banks for their forex needs this week, after the ban on bureau de change operators from the direct supply of FX from the CBN, a regime of transparency, ease of transaction, and stability is what they will be expecting as anything short of that will make last week’s crackdown on BDC operations an exercise in futility, reports Festus Akanbi

After a long spell of indiscriminate rate fixing by operators of Bureau de change in the nation’s foreign exchange market, the Central Bank of Nigeria (CBN) eventually came out of its shell to eliminate BDC operators from the chain of forex traders with access to official supply.

In the new dispensation unveiled at a press conference on Tuesday, the CBN said it was stopping the sale of forex to Bureaux De Change (BDC) operators. It also announced that it has now permitted banks to receive forex deposits.

At the end of the Monetary Policy Committee (MPC) meeting, members unanimously voted to retain the Monetary Policy Rates (MPR) at 11.50%.

The committee also retained the asymmetric corridor at +1%/-7%, CRR at 27.50%, and retained liquidity ratio at 30%.

And for those thinking the apex bank may have a change of heart over its action, its Director, Monetary Policy Department, Dr. Hassan Mahmud said there is no going back even as the CBN is set to commence the refund of capital deposits and licensing fees, where applicable, to Bureau De Change (BDC) promoters who had pending licence applications before Tuesday’s announcement of the end of FX sale to the currency dealers.

Similarly, the banking sector regulator, in another circular, directed all banks to set up teller points at designated branches across the country to fulfill legitimate FX requests for Personal Travel Allowance (PTA), Business Travel Allowance (BTA), tuition fees, medical payments, and SMEs transactions, among others.

However, as the nation awaits the implementation of the new policy of selling dollars directly to commercial banks for onward sale to the public, the Naira has continued to be at the receiving end with rates oscillating between N520 and N525 at the parallel market between Wednesday and Friday last week.

Such was the confusion and arbitrage that characterised the forex market after the CBN threw the bombshell, as some dealers moved to cash in on the CBN’s directives before the banks settle down to the business of full-scale forex sale to end-users.

Stunned by the CBN’s surprised ban from its supply of forex, some BDC operators said Nigerians FX users will pay dearly for the unfolding development, considering the unreliability of banks to carry the CBN’s instruction to the letters.

The current spike in the value of dollars is blamed on the decision of some operators to hoard the currency, having got winds of the CBN’s plan to ax that segment of the foreign exchange market as well as the panic buying by some FX users who anticipated a prolonged period of rates instability.

ABCON Fights On

President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the association would engage the CBN to address the ban on FX sale to its members. Gwadabe said the planned engagement would, among other things, seek to identify and sanction earring BDCs.

Gwadabe said in a statement that the pronouncement by the CBN did not stop BDCs from providing FX services as allowed by their operating licences and in their operating guidelines.

Gwadabe said, “BDCs are licenced to provide retail FX services, including buying from the public and also selling to end-users for allowable transactions, namely, PTA, BTA, payment of medical, and school fees.”

Bank CEOs: We are ready to sell FX

Chairman, Body of Bank CEOs, Herbert Wigwe, said authorised financial institutions in the FX market would ensure full compliance with the CBN directives to ensure FX stability. Wigwe said customers could walk into their banks to purchase dollars for legitimate transactions. He noted that the banks had agreed that the process would start immediately following a meeting with the CBN.

Wigwe, who is also Group Managing Director of Access Bank Plc, said the banks were ready to meet the mandate of the CBN, adding that they have more than enough capacity to deliver. He explained that the process would be centralised to avoid abuse.

In addition, Wigwe said banks yet to adhere to the mandate by the regulator to create a forex desk would be sanctioned.

There is no doubt that the assurance given by the chief executives of banks to ensure full implementation of the CBN directives in their respective banks came as a boost to the apex bank’s policy change, however, industry watchers contend that the promise made by bank CEOs, and the cooperation of banks’ staff assigned to interface with the potential forex buyers are different things.

According to the CBN Governor, on average, the bank trades $110million weekly FX of $20k each, to over 5,000 BDCs with total annual sales of $7.2 billion to Nigerian BDCs. The only place on planet earth where CBN sells FX directly to BDCs. The Governor also announced a ban on the over 500 BDC applications it receives monthly.

Emefiele however said, “The bank would henceforth discontinue its sales of foreign exchange to BDCs. Operators in this segment of the market would now need to source their foreign exchange from an autonomous source. They must however note that the CBN would deploy more resources to monitoring these sources to ensure that no operator violates our anti-money laundering laws; The bank would now permit commercial banks in the country to begin accepting cash deposits of foreign exchange from their customers.”

Economists Weigh the Pros and Cons of New Policy

In their separate interviews with THISDAY, leading economists, who described Tuesday’s intervention as necessary, however, cautioned that the apex bank needed to go the extra mile so that the policy will not be counterproductive at a period of rising demand for foreign exchange.

In an email exchange with THISDAY during the week, the Managing Director, Chief Economist, Africa and the Middle East, Global Research of the Standard Chartered Bank, Razia Khan, said the financial authorities must ensure that the new policy does not fuel the growth of more parallel markets in the country.

She stated, “While the pledge of reforms is encouraging (more FX supply to the I&E window, the likelihood that we do eventually see more adjustment to the I&E FX rate), the challenge in the interim will be to stop the emergence of a new parallel market.”

I&E window is the market trading segment for investors, exporters, and end-users that allows for FX trades to be made at exchange rates determined based on prevailing market circumstances.

She, however. warned that “Unless the supply of FX improves meaningfully, this is likely to remain a risk. However, a meaningful improvement of FX supply to the I&E window would be the best hope of halting parallel market trading for larger transactions,” adding however that, “Much will depend on the extent to which the authorities are also willing to tolerate price discovery on the I&E window.”

Looking Beyond Banks

Meanwhile, there seems to be a consensus among economists on the need for the regulators to create an additional avenue for the sale of foreign exchange.

The fear is that unless the CBN looks beyond banks for the sale of forex to the end-users, undue pressure may be brought to bear on the local currency, which may depreciate further and eventually make the new policy backfire.

Industry watchers said there is a need to learn from the past when officials of commercial banks made a kill from fx sales by giving all manner of excuses to disqualify customers from forex sale while some bank officials indulge in forex roundtripping.

This was the fear raised by the Group Managing Director, Cowrie Assets Management Limited, Mr. Johnson Chukwu when he spoke with THISDAY during the week.

Chukwu warned that “The concern is that the new policy may bring about more problems than the CBN intends to solve. The fact is this. You have a commodity that is in short supply. You have further constricted the supply channels, so it follows that unless you expand the supply channels you are going to have an increase in the arbitrage, so it’s expected.”

So, the question is, what are the other options available to the regulator?

Chukwu believes that the more the merrier. He said, “The basic thing for me is that the CBN should have a cocktail of other policies that will address all those concerns to ensure we don’t see a depreciation of the currency that will far outweigh the benefits of this new policy.

“In the first place, the Central Bank must find channels to provide FX to those legitimate end-users who were enjoying supply from the BDC market. These people include small-time traders, who are buying goods.

“Their consignments size is in the range of $50,000, $10,000, $5000. These people buy money from the BDCs, lodge it in the bank and transfer it in $10,000 (which the CBN allows) to their suppliers.

“If these traders go to the bank to open Form M and letter of credit and they are waiting for allocation from the CBN, they may wait for one year without getting any allocation and their businesses will die because they can’t afford to buy money from the parallel market.

“If you do not create the window that will enable them access money from the bank then, you will see them going back to the parallel market and they will buy dollars at any rate and you will see a serious effect on the local currency so, the CBN must have a cocktail of policy so that one, to ensure that those that have legitimate demands are satisfied, or to ensure that those whose needs were being met by the BDCs have access and that access is as stylus as the BDC access.

“Secondly, there are demand channels that the CBN has to agree with the federal government to outlaw or reform under the current arrangement.

“Vessel hire in Nigeria is denominated in dollars. It simply means if someone takes a vessel from the NNPC, he pays the vessels owners in dollars and most of them buy their money from the BDC market. Government should legislate that all cabotage transactions are denominated in local currency so that these people who are doing oil and gas trading will not need to be going to buying money from the parallel market.

Payment in Naira

“It is also important to state that payments to the Nigerian Ports Authority, (NPA) by people using vessels and payment to NIMASA are denominated in local currency, today, you have to pay NPA in dollars. It means those bringing PMS and others will have to source for dollars and if you go to the banks, you will not get these dollars, so the government will either legislate so that all such payments are now done in the local currency to avoid these demand that will go to the parallel market and shoot up the exchange rate.”

In his view, Chief Executive Officer, The CFG Advisory, Mr. Adetilewa Adebajo said the CBN’s spike on BDCs implies that $7.2 billion allocations will now be moved to the banks who will open dedicated tellers to process valid for FX transactions.

Adebajo believed “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.”

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

Spike in parallel market rates temporary

Chief Executive, Proshare Nigeria Limited, Mr. Femi Awoyemi shares similar optimism on the ability of the parallel market rate to stability very quickly.

He said, “Concerning the spike in the parallel market exchange rate, I agree with you said the spike in the parallel market rate is likely to be temporary, explaining, however, that “the retail market needed to fund payment of school fees, medical expenses, and travels would gradually adjust to sourcing FX from the banks as the banks themselves rethink the customer transaction experience and tweak services in a way that eases access to FX in the retail market.”

But Awoyemi disagrees with the CBN policy on interest rates, saying “My first observation is that it is odd to see the CBN attempt to control the supply and cost of money. Basic microeconomic frameworks suggest that policymakers can either control price (interest rates) or quantity (money supply) but not both simultaneously.

“The high cash reserve ratio (CRR) and high monetary policy rate (MPR) contradict the growth aspirations of the government.

“Besides expecting to see higher investment volumes in an environment of rampant insecurity is as good as a crab waiting to cross a river.”

Similarly, Chief Executive Officer, Global Analytics Consulting Limited, who is also a former Presidential Candidate, Abundant Nigeria Renewal Party, (ANRP), Mr. Tope Fasua shares Awoyemi’s optimism on the temporal nature of the current spike in the dollar exchange rate at the nation’s parallel market.

He said, “My take is that the spike in the value of dollar vis a vis the naira will be temporary especially if the CBN moves strongly on its stated policies and oversight function with the banks. The invisible trade transactions which the BDCs are meant to take care of will be well serviced through the banks thus reducing pressure on foreign reserves and the black market.”

“It was just impossible to manage or supervise thousands of bureaux de change. I reckon a lot of the funds allocated to BDCs ended up funding imports of which we haven’t been able to extricate ourselves as a country. So those imports may fall back entirely in the black market thus pushing their prices up. However, the same players have an opportunity if they consider producing locally.”

Banks will make the difference

However, unlike some other commentators on the new policy of the CBN, Fasua maintained that banks will make a difference once they settle down for business.

“I foresee better compliance by the banks than what we had before. The banks and their executives have a lot more to lose than sundry BDCs with no offices and no substantial prime movers behind them or the many licenses obtained by politicians and all sorts of powerful people.

“Bank MDs will ensure that their fx bidding licenses are not suspended because of small PTA transactions and there has to be collaboration among many people within the bank to perpetrate large scale heists.

Compliance, control, operators, and even executives have to come together for such to happen, and even then there is a high chance for whistle-blowing. I also believe that customers can and will put the banks under pressure and hold their feet to fire to prevent cheating. Banks that are. not complying will be reported as well. Most will avoid the embarrassment,” he stated.

In his analysis, Managing Director, Financial Derivatives Nigeria Limited, Mr. Bismarck Rewane described the bureau de change operators as financial intermediaries between the apex bank, the market, and the retail end.

He explained that what has happened in the past is that these guys were to sell foreign exchange principally to people traveling out of the country, but from tourists coming into the country, noting, however, that along the line, they derailed.

“This has become a source of concern to the regulators and rightly so. What has happened was that these guys will buy the dollar at N400 and an hour later, sell it at N500.

“So, in 2000, we have 74 BDC operators. By 2010, it had increased 27 folds, in other words, we had 2000 operators from 74. By 2020, the figure has gone up to 5000.

“In the last quarter, the federal government, in other words, the Central Bank of Nigeria spent more on travel to the tune of $472million, which is higher than debt service put at $172 million. No country in the world can survive that kind of hemorrhage, so that was why the CBN had to take steps,” Rewane said.

According to him, “Some have argued that after all, they were licensed by the CBN in the first place. The reality is that what has happened is like a daytime robbery. The question now is what are the steps to be taken?”

The Financial Derivatives boss said the first option is to stop everything as was done by the CBN.

Can the Banks Cope?

He said “There is need for administrative control, but the problem is that the moment you stop things administratively, you now create a certain black-market premium. People are going to be inconvenient. “The CBN says go to the bank. I agree with the CBN Governor, but you and I know that walking into a bank and coming out in five minutes is something else. It’s easier to put 60 flies in a matchbox than to go into a bank and come out in five minutes.”

Rewane is not unaware of the challenges of transacting business in Nigerian banks. That was why he called for close monitoring.

“So, anything that is cumbersome, that is inconvenient will drag people away further from the system. So, people will suffer. The ultimate solution, which I will like to recommend, is that the CBN should encourage everyone to go to the bank but it should sell to bureau de change at the parallel market rate by five percent, in other words, if the parallel market is N500, you can sell to the bureau de change at N490. The N10 margin is way lower than the N100 margin.”

He however warned that the efforts of the apex bank to instill discipline in the foreign exchange market will be counterproductive unless a market solution is put in place.

He insisted that “Nothing is cast in stone. The truth is that administrative solution has its limits. It will be abused one way or the other, so the best thing to do is to have a market solution and they can work together.”