How unorthordox FX policy widens exchange rate gap

By Joy Obakeye and Temitope Adebayo

The unorthodox foreign exchange policy of the Central Bank of Nigeria (CBN) has adversely impacted on the naira stability across all markets, and created huge premium between official and parallel market rates, the President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, has said.

This is even as the naira, bubble continues to burst as forces of demand and supply correct foreign exchange rate pricing across the Nigerian markets. As a result of pressures, the local currency has been losing its store-of-value feature as inflation continues to erode value of the local currency.

Gwadabe, who spoke in a chat with financial journalists in Lagos, explained that with the official market rate now at N430/$ and parallel market rate now at N730/$, a huge rate gape of N300/$ now exists in the markets.

For him, the selling of forex earnings at a fixed rate of N430/$ while open market rate is N730/$ is unorthodox practice that lacks credibility and transparency.

“That singular act encourages rent seeking, currency substitution that continues to hurt real sector operators and the overall economy,” he said.

He recalled that when the apex bank decided to suspend sales of forex to Bureau De Change (BDCs), in July 2021, the open market rate was about N501/$.

Over a year after, the naira to the dollar has depreciated significantly, with a lot of Nigerians not meeting their invisible transactions needs and the regulator not showing much commitment to meeting those needs.

Gwadabe, said the small retail exchange institutions – BDCs- remain at the centre of CBN’s exchange rate policies implementation, hence the need for the regulator and public to continuously support BDCs’ roles in exchange rate stability.

This, he added can be achieved through increased automation of their processes and providing more channels of transactions for sustainable price equilibrium while eradicating rent seeking, currency substitution and speculation.

“I am very confident that Nigeria will in not too distant future appreciate a stable exchange rate and availability of forex in the local economy as the right people for government policies’ implementation get such responsibility,” he stated.

According to him, the CBN Governor, Godwin Emefiele had tried to introduce many policies beyond conventional money supply that are not in line with market realities.

Gwadabe cited the Naira-4-Dollar scheme of N5 bonus for every $1 diaspora remittances as well as the N65 rebate for every dollar of non-oil export proceeds and other incentives as commendable, but require total overhaul with stakeholders’ engagement.

“I am not a prophet of doom and student of continuing naira depreciation but except fundamental goodwill and courage is demonstrated, the naira will continue to suffer loss in exchange for the greenbacks,” Gwadabe maintained. The question on the lips of everyone is that are the banks not having the allocation for invisible transactions?”

While responding to a question on where the BDCs are sourcing forex, he said though some BDCs are lucky to be operating at the international airport and other off-table transactions, majority of them are out of business due to lack or total absence of alternative sources.

“A licensed BDC in Nigeria cannot access oil proceeds, non-oil proceeds, and diaspora remittances. We need expansionary regulatory approvals on the scope of transactions and margin reviews,” Gwadabe said. According to him, an average BDC operator licensed by CBN is comatose and heading for extinction.

To strengthen the naira, Gwadabe believes it is time to allow competition and mutually-beneficial engagements among stakeholders and regulators.

He said, “Naira is the most difficult currency to predict in the world because of its vulnerability to leadership corruption, lack of competitive space, and the prevalence of ungoverned players.”

Despite the suspension of FX sales to BDCs, Gwadabe hinted that the apex bank not only supervises the activities of the BDCs but has started nationwide training for the operators to expose them to the vulnerability of money laundering, terrorism financing, and financing of proliferation of mass weapons of destruction.

Gwadabe disclosed that the apex bank has maintained that the suspension of FX sales to the BDCs does not lead to revocation of licenses as the operators are still under the purview of CBN regulations.

“However, the suspension has led to increasing practices of ungoverned space players, crunch liquidity of FX to the retail end of the market and the resultant exchange rate volatility. We in ABCON believe in self regulatory reforms as sine qua non to lingering exchange rate volatility. ABCON has always been proactive in ensuring BDCs participate and comply with global practices,” he stated.

Gwadabe suggested that it is the right time for Nigeria to embrace the competition model in its huge and sustainable diaspora remittances.

He urged the apex bank to leverage the capacity and skills of the BDCs operators and also reach out to them to enhance liquidity, and price discovery of the diaspora remittances.

“This agitation of stakeholders we will continue to advocate,” he said. “We urge the CBN to embrace our road map and create stakeholders engagement,” he said.

Meanwhile, investment banking analysts and economists are of the opinion that the risk of holding naira assets has continued to increase due to the rapid depreciation of the local currency across the multi-tiered currencies trading markets.

The sustained weakness of the Nigerian naira has reduced purchasing power, pushing household and corporate spenders in tight. Though the apex bank has insisted that devaluation is not an option, the naira continues to suffer forced devaluation triggered by excess demand.

Lower foreign exchange inflows driven by the inability of foreign investors to repatriate funds abroad have continued to impact the naira when paired against major currencies like the US dollar, Sterling, Euro and the like.

Naira depreciated further at the Investors’ and Exporters’ foreign exchange (FX) window by 0.50 Pper cent to ₦441.38 per the United States dollar from N439.17, according to data from the FMDQ Exchange platform.

In the parallel market where unmet demand by the local bank is being sourced by locals, the naira also depreciated by 1.09 per cent to close on Friday at N743 from N735 the previous week as a result of pre-election demand.

Data from the Central Bank if Nigeria showed that external reserves fell below $38 billion mark, lowered by 0.53 per cent from the closing position of $38.11 billion in the previous week to $37.91 billion.

Last week, Fitch Ratings said in a report that frontier markets have seen their local currencies depreciating over global recession concerns – though Angola’s Kwanza has gained strength following the country’s oil production advantage.

Specifically, Nigeria’s low crude oil earnings and depleting dollar reserves have negative impacts on the local currency pricing in the FX markets.

“As we draw closer to the election year and with the campaign activities by political parties taking full gear already, it is expected that the demand for the greenback will buoy further weakening of the legal tender”, Cowry Asset said in a note.