The fall in Nigeria’s monthly foreign exchange (forex) earnings from $3.2 billion to $1 billion in the last six months as oil prices tumble triggered yesterday’s suspension of weekly dollar sales to Bureaux De Change (BDCs) by the Central Bank of Nigeria (CBN’s). The stoppage will enable the apex bank to meet forex demand by domestic importers, preserve the reserves and naira. But, the BDCs have kicked against the policy shift, saying it will spell doom for the local currency and the economy, writes COLLINS NWEZE.
Aminu Gwadabe, Chief Executive Officer, SABIL Bureau De Change Limited, is always confident when discussing his business. But, the boisterous foreign exchange dealer lost his voice yesterday. He was contacted immediately the Central Bank of Nigeria (CBN) hammer fell on Bureaux De Change (BDCs) operators over what the apex bank called abuse of privilege and alleged sharp practices.
CBN Governor Godwin Emefiele announced a new foreign exchange (forex) policy that includes the stoppage of weekly dollar sales to BDCs).
“The bank (CBN) 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 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,” Emefiele said yesterday at news conference on the review of the contentious forex policy at CBN’s Abuja head office.
“There is fire on the mountain. The CBN has done its worst. We’re all running, chasing an elusive dollar. We have travelled that road before and knew it will only worsen the bad situation we are facing today,” Gwadabe, who doubles as the President, Association of Bureaux De Change Operators of Nigeria (ABCON) told The Nation.
In the sweeping review of the forex policy, Emefiele said. “The CBN would henceforth discontinue its sales of forex to BDCs. Operators in this segment of the market would now need to source their forex from autonomous source,” Emefiele disclosed yesterday at the CBN headquarters, in Abuja.
According to Emefiele, the CBN will monitor the forex sources to guard the violation of anti-money laundering laws by operators.
The apex bank took some measures on forex following a drop in oil prices from a peak of $114 barrel in July 2014 to as low as $33/barrel this month. The reserves have also suffered great pressure from speculative attacks, round-tripping and front loading activities by actors in the forex market.
Before the hammer fell, the CBN was selling $60,000 to each BDC weekly, translating to $167 million per weekly and about $8.6 billion yearly. The amount was reduced to $10,000 per BDC, translating 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,” said Emefiele, who added that the policy shift will enable it continue to fund matured letters of credit from commercial banks, importation of petroleum products, importation of critical raw materials, plants and equipment as well as payments for school fees and related expenses.
He flayed the BDCs of abandoning the original objective of their establishment, which was to serve retail end-users, who need $5,000 or less. The operators, he noted, have become wholesale dealers in forex to the tune of millions of dollars per transaction, only to come up with fake documentations like passport numbers, Bank Verification Numbers (BVN), boarding passes and flight tickets to render weekly returns to the CBN.
Pointing out that it was painful taking such sweeping measures, Emefiele said such steps became necessary to sustain its mandates as set out in the CBN Act of 2007.
BDCs operators kick
But, Gwadabe refuted the Emefiele’s claims. He said the regulator will pay heavily for its actions.
Gwadabe said: “The CBN cannot justify its actions because we control less than five per cent of the forex market value. Whatever imperfection is in the market, it is a wrong approach for the CBN to say it will no longer fund BDCs.”
Continuing, he said the BDC is a market driven by demand and supply, adding that by reducing the dollar supply to the market, the naira will fall as high as N400 to the dollar within the next six months, unless the policy is reversed.
According to the ABCON chief, the CBN has always blamed the BDCs whenever there is disequilibrium in the market. He described as worrisome that the CBN decision came few days after the International Monetary Fund (IMF) asked the CBN to raise the dollar liquidity in the market.
“It is a first step towards further devaluation of the naira but we will fight back. We provided N175 billion cautionary deposit to the CBN at three per cent interest rate. We will demand for the money even though we lost over $100,000 in exchange rate volatility as a result of depositing that money,” he said.
Also speaking, Managing Director, E.M Consolidated Investment Limited, Emeka Moses, said the CBN will learn the bitter truth about the roles of BDCs in the economy. He lamented that under Emefiele, the regulator has been treating BDC operators as if they add no value to the economy.
He said: “Let’s wait and see how the market will allocate forex without BDCs. Let’s see if banks that have severally been blamed for round-tripping will do it more effectively than BDCs. All the allegations against the BDCs are baseless because even if they exist, the CBN should learn to punish offenders.”
Moses warned that the policy could lead to liquidation of majority of the BDC operators, job loss and more volatility in the forex market.
The BDC operator said the forex market was in disarray before the CBN instituted BDCs in 2005.
“I am sure the policy shift will be temporary and they will come back to their senses unless there is a better strategy to sell to small forex users,” he said.
He predicted that the naira will exchange for N300 against the dollar in the first week of the policy implementation, and that the local currency will continue to depreciate if no positive action is taken.
But, Kennedy Abiodun, another forex dealer said the policy will help reverse the continued slide in foreign reserves.
He explained that country’s average import bill for the first nine months of 2015 was N917.6 billion per month, even though oil prices are now less than $35 per barrel.
His words: “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.”
Abiodun said the CBN acted to protect the reserves in the interest of critical segments of the economy.
Soothing relief for
manufacturers
Also, the Manufacturers Association of Nigeria (MAN) hailed the CBN’s action, saying the action will enable the apex bank to manage the free fall of the naira.
MAN’s President Frank Jacobs said that the continued funding of the BDCs was posing danger to the local currency. He urged BDCs to provide alternative funding window to the economy by sourcing their forex independently from other sources and injecting same into the market.
Jacobs said: “The association appreciates the challenges the country is passing through at the moment and will do everything possible to support the Federal Government to overcome the situation.”
Only last week, Senate President Bukola Saraki urged the (CBN) to relax its strict foreign exchange policy. He said the policy was doing more harm than good.
At a meeting with the Managing Director of the International Monetary Fund (IMF), Ms. Christine Lagarde, Senator Saraki said businesses, especially the small scale were suffering unnecessarily.
He said: “The IMF should support our CBN to bring in low interest loans to SMEs. We need to encourage entrepreneurs and make most of our new graduates job creators rather than job seekers. This is an area where we need the financial support and technical assistance of the IMF.
“As legislators, we play an important role in making our people understand IMF’s advice, policy trade-offs, consultations and other engagements, so that ownership, transparency and accountability are brought to bear on economic policy choices.
“The Nigerian legislature strongly believes that having a collaborative working relationship with the Executive Branch of government brings development closer to the people.”
The Senate President had earlier pushed for a similar measure at a private meeting with CBN Governor Godwin Emefiele. He urged the apex bank to come up with a more flexible foreign exchange (forex) regime and reduce the restrictions on the market, which does not allow businessmen to bring in foreign exchange or utilise what they have in their accounts.
Saraki reportedly urged the governor to consider the effects of the present forex regime on small businesses which are dying following evaporating crude oil revenue.
He explained that his office had been inundated with complaints from small business owners, complaining that their businesses are being threatened by the huge bottlenecks now involved in doing business.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said BDCs and parallel market spread compared to the official market rates continued to widen considerably in the last few months. “Compared to the N197 to dollar peg of the local currency, rates at the BDC segment of the market were as high as N265 to the dollar. Irrespective of the dollar sales to BDCs last Wednesday, the rate depreciated by N1 to close at N266 to the dollar and further depreciated N14 to N280 to dollar the next day as huge dollar demands remain unmet,” he said in an e-mailed statement.
Chioke said in the first four trading days of the year, external reserves had declined 0.5 per cent year-to-date to $28.9 billion as inflows continue at a lower rate relative to outflows given lower oil prices of $32 per barrel (Brent).
The IMF boss, Ms. Chrisitine Lagarde who completed a four-day official visit to Nigeria last week shared her thoughts on possible ways to deal with the current challenges facing the economy.
She stressed that her visit was only to offer advice and reaffirm the support of IMF to the President Muhammadu Buhari led government.
Noting the fact that the resilience demonstrated by Nigerians as seen in the outcome of the 2015 general election buttresses the country’s ability to overcome the challenges ahead, she called on managers of the economy to spend wisely in the face of declining crude oil earnings.
The IMF chief urged the government to build resilience by making careful decision on borrowing. Analysts insist that with a budget proposal to invest borrowing solely into capital spending, most especially in power, infrastructure, housing and transportation, we believe the Presidency is on the right track. Her visit was also meant to give policy makers an opportunity to review their stance on critical issues in the economy within the context of global perception as the country makes hard choices in 2016.
How far will oil prices fall?
Managing Director, Financial Derivatives Company Limited, Bismark Rewane said the idea of sub-$30 per barrel (pb) oil was unthinkable.
“In fact, in some circles, it’s a question of when, not if. The Organisation of Petroleum Exporting Countries (OPEC) in its last meeting – which ended in utter disarray – dashed any hopes of a supply cut and even raised the threshold to 31.5 million barrels per day (mbpd),” he said.
Rewane said the immediate impact was more turmoil in the market as Brent crude fell to just below $37pb – lowest level since December 2008 – amid a wider commodities sell-off.
OPEC is responsible for 40 per cent of world oil supplies. The lack of any real decision betrays the deep divide within the cartel and it could mean even more pain for some members in the new year. Some oil producers have the capacity to increase production while some others do not.
He explained that those in the latter category are suffering the most and this has led to strained relations not just within OPEC but between the cartel and non-OPEC producers as well.
“Most traders and analysts are convinced that prices still have further to fall. So where lays the bottom? How much lower can the battle for market share drive oil prices? How long can OPEC hold out? The only sure thing is that more losers than winners will emerge as oil prices test seven-year lows,” he said.
He said despite the challenges, the currency pressures are likely to intensify due to the sharp fall in oil prices. The CBN will continue to intervene in the markets, running the risk of external reserves depletion.
Oil outlook
The outlook on oil prices remains bearish as crude prices are unlikely to rebound with slowing demand from emerging economies such as China, increased production from non-OPEC producers, and a price war among OPEC members. This has significant implications for Nigeria’s budgetary framework, which is premised on a benchmark oil price of $38pb. Funding options for the government are limited revenue; if oil prices persist in the current downward path, there may be further revisions to the benchmark price.
The impact on the external balance will be significant. The current account balance is estimated to move into a deficit position of -$10.8bn, (-2.2 per cent of the Gross Domestic Product (GDP) in 2015. The 2016 budget assumes a fiscal deficit of N2.2 trillion, a figure that may widen further due to revenue shortfalls.
