The Central Bank of Nigeria on Tuesday announced the stoppage of sales of foreign currencies to Bureau De Change operators.
Speaking after the Monetary Policy Committee meeting, the CBN governor, Godwin Emefiele, said the bank will also not issue new licenses to BDCs. He said the so-called black market had become a conduit for illicit forex flows and graft.
Being a major market for Nigerians transacting businesses and traveling abroad, the CBN supplies the BDCs billions of dollars annually.
The ban does not stop the operations of the BDCs; it means operators will have to source forex from other suppliers — not the central bank. The CBN will be selling directly henceforth to commerical banks, from where customers who have legitimate and applicable transactions will be able to buy.
Sourcing dollars and other forex from a third source (including buying from Nigerians who receive foreign currencies) means the BDCs may likely be selling at higher rates.
After the announcement Tuesday, Naira responded with a decline against the dollar at both the official and black markets.
On the streets, Naira closed at 505.00 per $1, a 0.20 per cent devaluation from N504.00 it traded on Monday.
At the official Nafex window, it closed at N411.67, from N411.50 the previous day.
Some Nigerians have worried the CBN move may further devalue the local currency, but experts say the policy is necessary to curtail the illegal activities at the BDCs.
An economist, Paul Alaje, said the policy, if well implemented, will ultimately be beneficial although the immediate impact may be negative for the Naira.
“The problem is that dollar itself will now be relatively scarce in that market because CBN intervention will not be coming in,” he said.
“And you know when the dollar is scarce the price will go up eventually there will be a seizure.”
Mr Alaje said one way or the other the CBN will have to implement measures that will tackle forex racketeering at the BDCs.
“There have been reports of those who applied for the BDC license and were granted and immediately sold it for as high as 80 to 100 million naira.
“And some rather than sell to those who want to travel amongst regulation, they do bulk sales
“Eventually the disbursement doesn’t get to those that CBN intended for: the ordinary people that want to travel, those that want to pay school fees.
“BDCs have now become where people can access dollars and speculate as to when it will increase so there has been a lot of grand treason.
“The truth is that this decision will hurt us in the short term and if not properly managed it may extend to the medium term,” he said.
He expressed doubts the latest policy will go through due to political reasons. He encouraged CBN to create centers where those who want to do genuine business could access forex either banks or through CBN.
“I doubt if CBN will be able to keep the policy for political reasons because this is the second time in recent time.
Also, a financial analyst, Ayodeji Ebo, said the policy if not well implemented may increase inflation and also decrease the standard of living of Nigerians.
“We expect an initial reaction in terms of scarcity because when the margin of supply reduces, the BDCs will only rely on forex from autonomous sources and that depends on the inflow,” he said.
“A lot of items that are not on the CBN list will find it difficult to access forex through the bank as a result will push the demand to the parallel market.
“This will cause pressure at the parallel market because the demand will be very high.
“If not properly implemented, there will be a major increase in inflation rate because the cost of goods and services will move up, because a lot of them are dollar-based.”
He advised that Nigerians should brace up for harder times in the medium term.
“What the banks were able to achieve with the setting up of a remittance desk, they need that model across to sell forex too as to the legitimate demand,” he said.
Another economist, Babatunde Moses, also predicted that Nigerians are likely to experience additional inflationary pressure in the short term because BDCs are major sources of forex to the general public.
“So prices of imported goods (which constitutes a large share of our daily consumption) are likely to go up in the interim since USD is now more scarce,” he said.
On the policy effect, he said the CBN is likely to achieve its aim of reducing round tripping and illegal trading happening at the BDC level.
“The banks are more closely monitored so the extent of malfeasance is reduced at their level (though not guaranteed). The issue now is whether the benefit of curbing the BDCs will be greater than the possible attendant cost of depreciation of the Naira (even though just for the short term).
“The Naira is likely to depreciate in the short term due to the sudden shortage of USD in the market. That’s already happening as we speak. The long term impact on the Naira is not very clear, and depends on whether measures have been put in place at the banks to manage this policy. Similar policies restricting BDCs in the past have played out in a similar fashion, but were eventually reversed ultimately. We might see the same thing happen again,” Mr Moses said.
According to the chief executive of Financial Derivatives Co., Bismarck Rewane, BDCs have exploited the market by buying dollars from CBN at 390 naira and then selling them at 500.
This decision will enable the bank to close such companies.
“It will give the central bank enough time to sanitize the bureau-de-change space, leaving only the credible institutions,” Bloomberg quoted him as saying.
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