The CBN’s Sledge Hammer on Bureau De Change

The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, has announced the end of Foreign Exchange (Forex) sales and new licence approval to Bureau De Change (BDC) operators in the country. Emefiele disclosed this at the end of the Apex Bank’s Monetary Policy Committee (MPC) two-day meeting in Abuja on Tuesday 27th July 2021.
The Monetary Policy Committee is the highest policy-making committee of the CBN with the following mandate: Reviewing economic and financial conditions in the economy, determining appropriate stance of policy in the short to medium term, regular review of the CBN monetary policy framework, and adopting changes when necessary and also communicating monetary/financial policy decisions effectively to the public and ensuring the credibility of the model of the transmission mechanism of monetary policy. The MPC meets quarterly, except in the event of an emergency.
Reading the MPC’s decision, Emefiele said the MPC decided to hold all policy parameters constant, believing that a hold stance will enable the continued permeation of current policy measures in supporting the recorded growth recovery and macro-economic stability. The committee thus decided by a unanimous vote to retain the Monetary Policy Rate (MPR) at 11.5%; retain the asymmetric corridor of +100/-700 basis points around the MPR; retain the Cash Reserve Ratio (CRR) at 27.5%; while also retaining the Liquidity Ratio at 30%.

Read Also: CBN’s Naira-For-Dollar Policy: Will It Boost Currency Stability?
Speaking on the decision to stop forex sales to the BDCs, Emefiele said the MPC noted with disappointment and great concerns that the BDCs had defeated their purpose of existence which is the provision of forex for retail use, but instead, they had become wholesale and illegal dealers and the ban was necessary as the parallel market has also become a conduit for illicit forex flows and graft.
He said, “Operators in the BDC have not reciprocated the gesture to help maintain price stability in the market since the CBN had been selling forex to them. They have remained renegade and so greedy, recalcitrant with abnormally high profit from these sales while ordinary Nigerians have been left to feel the pain and therefore suffer. Given this rent-seeking behaviour, it is not surprising that since the CBN began to sell forex to the BDCs, the number of operators has risen from a mere 74 in 2005 to over 2,700 in 2016, and almost 5,500 BDCs as of today. In addition, the CBN constantly receives nothing less than 500 new applications from BDC licences every month, and we, therefore, begin to wonder, what is in this business that everybody must be in it?”
The BDCs, he observed, had continued to make huge profits while Nigerians suffered in pain. He asserted that the measure is not punitive on anyone, but it is to ensure the CBN can carry out its legitimate mandate of serving all Nigerians
Emefiele further stated that weekly sales of foreign exchange by the CBN will henceforth go directly to commercial banks. He said the regulator will “deal ruthlessly” with banks allowing illegal forex dealers to use their platforms and will report the defaulting international organisations to their regulators.
Emefiele said banks are mandated to immediately and transparently sell forex to customers who present the required documents. And all banks are to immediately create dedicated tellers for the same purpose.
He said international bodies, including some embassies and donor agencies, have been complicit in illegal forex transactions that have hindered the flow of foreign exchange into the country. The CBN governor said the organisations have chosen to channel forex through the black market rather than the official Investors and Exporters window, called Nigerian Autonomous Foreign Exchange (NAFEX).
Meanwhile, the naira fell slightly to the US Dollar at the parallel market a few hours after the CBN announced the development. According tonaijabdcs.com, the official websites of the BDCs, the naira which exchanged to the dollars at N503/$ on Monday 26 July was bought and sold for N503 and N505 on Tuesday evening and N515/N525 on Wednesday 28 July.

Hitherto, the CBN had been supplying each licensed BDCs $10,000 twice per week at the rate of N393/$1 with the instruction that they should sell with a margin of N2. Most BDC operators however sell beyond the approved margin levels.
The Association of Bureau de Change Operators of Nigeria (ABCON) has since convened an emergency meeting of all BDCs operators in the country. The meeting confirmed the widespread opinion that the parallel market clusters; especially in Lagos and Abuja were expectedly tense and in panic mode, and were assembled to assess the implication of the new development.

The CBN licenses and regulates Bureau de Change (BDC) operations in Nigeria to achieve the following core objectives: Providing access to foreign exchange to small-scale end-users and serving as tools for the management of exchange rate. Other objectives are to assist in the fight against illegal financial activities; facilitate economic activities; and provide economic data for policy decisions.
But in recent years, it has been observed with grave concern that certain deficiencies are apparent in the operational effectiveness of BDCs, which counteracts the aforementioned objectives. In particular, the avalanche of greedy operators only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates; weak and ineffective operational structure, resulting in the subsector completely abandoning the objectives for its establishment, and depletion of the country’s foreign reserves in view of the unusually large number of BDCs have put the continuous funding of the BDCs by the CBN in extreme unlikelihood.
The CBN’s weekly supply is the major rationale for the abundance of BDC operators, many of whom have been accused of carrying out speculative activities. Hence, the new development is being interpreted as beginning of the end of the reign of the currency traders, if sustained.

Bureau De Change is originally meant for light travellers or purely emergency needs, for example, someone that is in transit and has no time to go to the bank can just stop over at the airport and buy few dollars and travel with it. The CBN was allocating forex to them to make foreign currencies easily accessible to users in largely unofficial or urgent circumstances. With the special allocations coming to a seeming halt, the BDCs will need to source their monies themselves because they were perpetrating illegal dealings with the CBN privilege.

The announcement is a demonstration of courage by the CBN to finally nip in the bud the excessive brigandage and sharp practices that have permeated and overshadowed activities of the parallel market; which itself is antithetical to the objectives behind its creation. Several initiatives, rules and regulations have been introduced by CBN to modulate the activities of the BDCs markets at various times in the past have attained minimal degrees of successes due to non-compliance as a result of weak implementation strategies.
As pointed out earlier, the ban has placed additional pressure on the already pressurised naira as banks don’t have enough dollars to give out to their customers on demand. With the new development, getting dollars would be more difficult than what was already obtainable prior to the ban. The sudden discontinuation would also lead to further disruption to the exchange rate in the parallel market, as the commercial banks settle to adjust to the fresh CBN directive, there is also a knee-jerk reaction from market participants induced by the urge to hoard and stockpile the Forex in their possession to mitigate an expected exchange rate pressure. Hoarding will only lead to a spiral that can make the exchange rate deteriorate much faster because there may not be enough supplies to keep the market reasonable. The effectiveness of the modalities in disbursing Forex to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates.
In perspective, the decision can be well justified as a veritable tool to sanitise the country’s foreign currency markets that have been beset with crass irregularities for a long time now. But it has its merits and demerits like most economic decisions. The new Forex policy, if well implemented and the sting of its short-term pressure absorbed and cushioned in time, is in the best interest of the Nigerian economy in the long term. The move will also solve some Forex problems caused by BDCs as one single exchange rate can now be obtainable to ensure uniformity of conversion rates and enforce market sanity. 
The new policy is consistent with the CBN strategy to unify exchange rates and bring more transparency to the forex market. Exchange rate unification is in line with the International Monetary Fund (IMF) and the World Bank’s recommendations to improve the country’s profile and credit standing. It signifies that the country is getting serious in its reform efforts. It will also slow down the rate of depletion in the country’s external reserves. The move is likely to check the round-tripping of forex but will reduce the supply of forex in the parallel market. Speculative demand for forex is also likely to reduce substantially. 
Superficially, the action of the Apex Bank is not an absolute solution as it is mainly about tackling the symptoms rather than dealing with the causative factors of the flaws marring the forex market; which is a direct consequence of the CBN’s policy choice of a fixed exchange rate regime and administrative allocation of forex; a policy regime that has created a huge enterprise around foreign exchange viz-a-viz round-tripping, speculation, over-invoicing, capital flight and so on. Mere moving of retail forex transactions from BDCs is tantamount to a cosmetic treatment or an overt window-dressing; moving the can down the road from BDCs to Commercial Banks. The same issues that overwhelmed the BDCs would likely manifest even with the Commercial banks if more thorough and holistic policy programmes that will monitor and stabilise operations are not introduced. The market must be allowed to function naturally without excessive strangleholds and manipulations.
The move could also increase the rate of unemployment in the country as over 5,000 licensed operators and their employees could be suddenly thrown into the labour market to find alternative means of livelihood. Also, the gap between the NAFEX and parallel market rates is likely to widen further with dollar shortages in the parallel market. It is therefore important that the CBN should ensure that Forex purchase via banks is made stress-free with minimal bureaucracy and encumbrances. The tiresome onerousness associated with procuring Forex from the official channels is what made people to gravitate more towards the parallel market where transactions are less cumbersome and resolved with ease and speed albeit at higher prices.
The restriction of the BDC operator is just one of the series of regulations the CBN has embarked on. It had earlier replaced the highly discounted CBN official rate with the NAFEX window, a fairly liberal segment in which its exchange rate unification programme is anchored. The stoppage of forex sale to BDC operators may have taken the programme a step further as the country battles its currency crisis.
The naira has faced intense pressure as demand for foreign currencies outweighs supply. The apex bank a few months ago extended indefinitely the naira-for-dollar commission, which seeks to encourage Nigerians in the diaspora to wire Forex through the official window.
As forex supply dries up, the external reserve dropped less than $33 billion recently, the lowest in the past year, before a gradual accretion that pushed it up a little above $33 billion just recently. The gross component was $33.3 billion while the liquid form was $33.05 billion. There is fear that the size of the external reserve can barely cover the value of the country’s six-month import, which is accelerating at a fast rate.
With a circular yet to be issued to make the policy official; short-term sustenance will be dependent on the robust mechanisms put in place to ease the procurement of forex from commercial banks for economic needs and preventing the re-appearance of same operational setbacks that stymied the BDC operators, it will also depend on the CBN’s ability to hold its ground against the political and elite class, who are often linked to the ownership and usage of the business and will likely attempt to intimidate it into a full or partial volte-face on the policy. 
The impact of the development on commerce is significant as Nigeria is an import-based economy and a surge in dollar rates often translate to the astronomical increase in the domestic price of goods, services and commodities across all facets of our local markets. People who engage in exports or any activities that involve dollar exchange would be adversely affected by this ban, and the country is at risk of depleting reserves, and a possible challenge of endangering the struggling economy also exists. Foreign exchange is already scarce right now, even for people buying basic travel allowance. The country is not earning as much foreign exchange as it is using. So, there exist the risks of depleting reserves and endangering trades. 
The ban will heighten the pressure to better management of foreign exchange by CBN and the commercial banks to prevent worsened Naira depreciation. The circumvention of CBN guidelines by commercial banks or its staff by not disbursing the Forex as instructed or by hoarding and selling the majority portion of allocated Forex at inflated prices to pre-selected BDCs through the backdoor is a potential happenstance that could undermine any gain in the new policy and it must be diligently checked to ensure it does not breed 
a new form of forex bazaar that will entail BDCs sourcing Forex at high prices from the commercial banks and selling in the parallel markets at outrageous rates.
In conclusion, the government needs to do more on expanding the local economy, especially driving growth in export earnings and boosting local production with massive investments in the real sector and infrastructure that will stimulate economic growth thereby reducing volumes of imports and engendering a favourable balance of trade and balance of payments

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