Sustainability challenges of BDCs’ dollars funding

Nigeria’s falling foreign exchange reserve and lingering issues against BDC operations in the country have become topical, especially with the current dwinding of profile foreign exchange. CHIJIOKE NELSON writes on the sustainability challenges of funding the segment

THE beleaguered foreign exchange relationship between the naira and other major currencies, particularly the dollar, has long evoked blames, thoughts, arguments and counter claims. But the least considered has been the way out.

Surely, one of the topical issues about the falling profile of the naira has been about the bureau de change operations, consisting of over 3,500 operators. It has been about their mode of operations, supervision and adherence to rules. In fact, it has been more about the weekly funding, sometimes called the “intervention” of the Central Bank of Nigeria (CBN) and how they are disbursed- to who? and why the disbursement? and how much?

There has been assessed and alleged round-tripping, connivance with roadside operators (black market) and sources for terrorism financing at various times. These suspicions may not always be wrong at all the times, because “in the gathering of the 12, the traitor was among.”

BDC sector, widely acclaimed to constitute less than five per cent of the country’s foreign exchange market, may have made name for itself because of the regular weekly intervention of the CBN, put at $30,000 per operator. Of course, CBN would be right any time to demand explanations on how its disbursements to the segment were administered.

The present dilemma is bothering on the continuation of the trajectory, that is, the continuation of funding of the segment, which would gulp over $90 million for every intervention. The reality on ground is that the reserves have been depleted to a record and the accretion plan is suffering serious setback. In fact, the hope of raising the reserves seems “hopeless”, hence continuous depletion is as good as risking it all.

Just last weekend, Nigeria’s Bonny Light crude oil hit its lowest level at $31.49 a barrel due to global crude oil glut at the international market. The price of Organisation of Petroleum Exporting Countries (OPEC) basket of 12 crudes stood at $31.49 a barrel compared with $32.28 it earlier recorded. Nigeria and its foreign exchange earnings capacity is involved here.

The new OPEC Reference Basket of Crudes (ORB) include Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).

On the other hand, the decline in export trade profile, which stood at N2.33 trillion in third quarter 2015, over N2.65 trillion in second of 2015, has been attributed to a fall in crude oil exports worth N372 billion.

According to the National Bureau of Statistics, the structure of Nigeria’s exports is still dominated by the commodity, which contributed N1.61 trillion (69 per cent) to total domestic export in 2015, while the natural gas recorded N265.2 billion in the period under review.

There is no gainsaying that there is need to preserve the nation’s reserves under the constrained foreign exchange earnings capacity. With tumbling foreign exchange earnings, amid huge import demand, many are already reinforcing their argument for further devaluation of the currency as a way out. But that may be the last resort and in distant future, if the leakages are plugged now.

Presently, Nigeria’s foreign exchange reserves stood at $29.4 billion as at December 18, due to drawdown in defense of the naira. As a result, the CBN further rationed dollar supplies to BDC operators from $30,000 to $10,000, in its bid to save the foreign reserves.

For financial analysts, the development is an indication of more trouble for the economy, because the crude oil price remains on the permanent downward mode- in reality and in projections. At this point, we must not lose sight of the fact that oil revenue accounts for 90 per cent of Nigeria’s foreign exchange and 70 per cent of total revenue.

Strong arguments have been reiterated that another pressure point in the foreign exchange market remains the BDC segment, which to an extent, the activities of some operators therein remain opaque, causing non-stop measures by the apex bank over the years to properly organise it, yet with more efforts required.

According to a source, the continuous funding of BDCs depletes the external reserves by an average of about $7 billion yearly, as there are presently about 2,990 registered BDCs in the country.

Of course, BDCs are the retail segment of the forex market. As at 2006 when the practice of funding BDC operators started in Nigeria, only two countries in the world were involved in it – Nigeria and Kenya. However, Kenya has since discontinued the practice. Funding of BDCs, according to the source, has led to the dollarisation of the economy because dollar cash is available.

The source added that the continuous funding of this arm of the forex market portrays the country in negative light as the lack of money trail for expenses further reinforces the perception of a corrupt nation involved in money laundering activities. Even as the apex bank introduced the Bank Verification Number in transacting foreign exchange in the segment, it has met stiff resistance.

CBN, currently considering discontinuing its twice-weekly dollar cash sales to the BDCs as it seeks to sanitise the sub-sector, may be planning prepaid electronic cards that will stem the sale of dollar cash by currency dealers to their customers.

The former President of the Chartered Institute of Bankers, Okechukwu Unegbu, has already urged the central bank to stop allocating foreign exchange to BDCs.

“All over the world, BDCs source foreign currencies from visitors coming into the country and foreign investors but here, CBN allocates money to them and this is why we are facing this problem. CBN had seen the deficiency.

“I would have thought that CBN would stop allocating dollars to BDCs and bring operational procedure for them to assess either from oil companies or visitors and tourists. By so doing, you would eliminate those ones on the street,” he had argued.

Still, the Manufacturers Association of Nigeria (MAN) has joined the call on CBN to stop funding the BDcs as part of measures to salvage foreign exchange earnings in the country.

MAN, in its position on the current state of the naira, noted that BDC should provide alternative funding window to the economy by sourcing independently and supply to the market.

MAN added that export of manufactured products and other finished products should be encouraged in order to make up for the deficit in the market, while exporters should be encouraged to repatriate accrued funds.

The President of MAN, Dr. Frank Jacobs, expressed concerns over the funding of the BDC market by the CBN, noting that the BDC market, under the present arrangement, act as mere distributive conduit pipes by simply getting the allocation from the CBN and selling to very few Nigerians for profit without much value addition.

“Foreign exchange allocated to the Bureau de Change as well as from other sources should be channelled to the productive sectors of the economy, especially manufacturing, for the importation of essential inputs and machinery that are locally available as well as to the social welfare segment of the society like hospitals, schools among others,” he said.

While, some experts have argued that the volatility observed in the foreign exchange market reflects the symptom of broader economic problems such as the import-oriented structure of the economy, continued inflationary pressure, fiscal imbalance, other external factors plaguing the naira- Nigeria’s heavy import dependency is majorly responsible for the high foreign exchange outflow and the perennial weakness suffered by the naira.

About a third of Nigeria’s forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money merely for transfer payments. Also, the country’s infrastructure deficit explains the huge level of importation of processed and final goods.

Nonetheless, the Managing Director of Financial Derivatives Company, Bismark Rewane, said the US rate hike was expected.

He added: “This will put more pressure on the CBN to devalue the naira because the rate hike has effectively strengthened the US dollar. And with the price of oil at $37 a barrel, there is a need for an adjustment of the local currency. It can no longer be avoided because commodity prices are certain to plummet further, so Nigeria must face the reality of its situation. We can no longer avoid devaluation.”

But the CBN Governor, Godwin Ifeanyi Emefiele, has expalined at every opportunity that “the only thing that will reduce pressure on our currency is by producing those things we are importing today.”