Concerns over naira’s fair value after CBN’s $2b lifeline
• Apex bank injects $606.8m to increase liquidity in one month
• Informality, lax governance of BDCs, moral hazards present fresh risks
• Disquiet over BDC recapitalisation two months to deadline
• Gwadabe: We are awaiting merger, acquisition framework
The Central Bank of Nigeria (CBN) is retooling its regulatory frameworks to wean the foreign exchange market from institutional malpractices, raise the bar of transparency and increase the confidence level.
Last week, the Bank unveiled two new sets of rules that are expected to consolidate its institution-rule-led regime, which commenced last year with Yemi Cardoso’s appointment.
Unlike the demand management approach adopted by Godwin Emefiele, Cardoso seems to have favoured institution-rule building with dozens of regulations rolled out since last year.
After about $2 billion intervention to stabilise the market and ensure recovery of the local currency from continuous depreciation, stakeholders are concerned about the sticky rate of the currency to the U.S. dollars.
The Nigerian currency faced tremendous pressure in March after trading at N1,300 per dollar. The naira traded at N1,500 in August and depreciated for most of September. The naira lost about 75 per cent of its value yearly, driven primarily by rising inflation and growing demand for FX. Though the naira gained against the U.S. dollar in the official Nigerian Foreign Exchange Market (NAFEM) on Friday, October 4, 2024, rising by 1.69 per cent to N1,631.21, there are concerns about its sustainability.
As the Federal Government commences the sales of crude oil and refined petroleum products in naira, there is optimism that the pressure on foreign exchange reserves will ease, leading to the stabilisation of the exchange rate and control of inflation.
Notwithstanding strengthening the normative framework, the apex bank may have to narrow the gap between its intention and policy actions, which many observers have dismissed as ineffective in addressing the gross character deficit among bank managers.
Already, the regulator is said to have held a series of stakeholders’ meetings where it sought the cooperation of bank chiefs as it explores different tools to sanitise the market and instil confidence.
As expected, the bankers have conceded to working with the CBN to increase transparency and reduce manipulation in the system among officials manning the lush FX desks, it is not clear how the CBN would deal with the endemic frauds in isolation from other entrenched moral risks in the financial system.
The CBN has made several significant reforms towards addressing Naira depreciation, such as probing and clearing FX backlog, limiting forex for foreign education and medical tourism, increasing BDCs’ minimum share capital, and curbing FX speculators, among others.
A banker, who confided in The Guardian, explained that the CBN would necessarily need to adopt more stringent sanctions against market manipulation, which he said would require extra regulatory rules to deal with.
Another source with a long-standing working relationship with the financial regulator, pointed to a scanty institutional memory as a major setback to the CBN’s quest for a more transparent market, insisting that market manipulation is a product of insider dealing, which the Bank would need deeper operational insight (and not just rules) to uncover.
With boards of deposit money banks (DMBs) still populated by individuals considered as ‘grandmasters’ of the financial service sector and ex-central bankers, there is a general feeling that the Central Bank is behind the antics of racketeers in the banking sector.
Regrettably, the Bank had let go of some of its experienced executives in the wake of the prosecution of its ex-governor, Godwin Emefiele, as part of the “housecleaning” process President Bola Tinubu instituted. Some of the dismissed employees, who are seeking judicial intervention, were reportedly indicted alongside Emefiele.
But what the CBN seems to have lost to a robust institutional memory, it may have gained through a more detached and independent team, enabling the operatives to swing into action without many constraints and patronage.
The CBN has issued a litany of regulations since June 2023 market-led reform (which plunged the value of naira from N463/$ to below N1600/$) as it sought an effective pathway to fixing the age-long currency crisis, which the country has paid dearly to manage.
In September alone, the Bank sold $543.5 million at the spot market of the Nigerian Foreign Exchange Market (NAFEM) to authorised dealers to stimulate the much-needed liquidity in the retail market.
Earlier in August, the CBN confirmed that it sold $876 million to end users through a Retail Dutch Auction System (rDAS) to reduce the demand pressure market and promote price discovery. In July, the bank injected $106.5 million. Previous interventions have been deployed with significant movement in the value of Naira, until recently.
In a statement, Omolara Duke, director of the CBN’s Financial Markets department, emphasised the importance of spot sales as part of the broader FX management strategy. “The CBN will continue to facilitate the supply of FX into the Nigerian foreign exchange market to ensure market stability and meet the country’s foreign exchange needs,” Duke said.
The CBN hopes that by transparently sharing the rates at which FX was sold to authorised dealers, the market will gain insights into fair pricing, helping to guide future transactions.
Again, the regulatory intervention revealed the extent of fraud in banks’ dealings. Whereas the spot market traded between N1604/$ and N1670/$ at the spot market, the CBN sold to the banks at an average of N1554.59/$.
As in previous similar interventions, much of the subsidised dollar was either round-tripped for or sold through the back doors to black marketers by rent seekers.
In the same September, the Bank sold an estimated total of $63.32 million to the eligible 1,583 Bureau de Change (BDC) operators in two tranches, bringing the total value of the dollar it pumped into the retail market to $606.82 million. Until earlier this year when 4173 of the operators were axed by the regulator, the CBN had to fund close to 6,000 BDCs weekly to unlock liquidity in the retail market.
In July 2021, the Bank made a U-turn on the weekly funding, accusing the operators of money laundering and sundry market manipulation practices. But the lifeline was restored earlier in the year, following the crisis of illiquidity that pulled the naira to as low as N1900/$.
Subsequently, Cardoso’s team rolled out a new set of regulatory guidelines, which seek to restrict cash transactions, digitise the processes, liberalise funding sources, impose new capitalisation and institute governance structure on the operators, who are required to reapply for fresh licences.
“Payments to customers for cash purchases of foreign currency, the equivalent of above $500, shall be by transfer to the customer’s naira bank account. If the customer is a non-resident (whether Nigerian or not), a BDC shall issue the customer a prepaid NGN card,” a clause in the guideline specifies.
The extensive guideline took effect June 3, while the operators have been given six months to meet the new capital requirement pegged at N2 billion for tier one and N500 million for tier two. But less than two months into the new regulatory era, the operators said they remain resolute in their demand for milestone review, insisting that the regulator is yet to furnish them with sufficient information to address the grey areas.
The President of the Association of Bureau De Change Operators of Nigeria (ABCON, Dr Aminu Gwadabe, said “disquiet and anxiety” have taken the place of earlier protests from his colleagues as the December 3 deadline draws closer.
“The financial requirements for the new recapitalisation of N500 million for tier two and N2 billion for tier one within the stipulated six-month period is high, unattainable and a tall order. The issue of our request for frequently asked questions (FAQ) usually attached to new guidelines are yet to be addressed by the apex bank,” he said.
He claimed that the CBN had yet to respond to a request for a framework for mergers and acquisitions even as ABCON nationwide has reviewed the roadmap and made its recommendations.
He added: “We have also written to remind the apex bank of our request for an appeal to extend the deadline to reflect industry standards of 18 months to enable inclusiveness of our operators.” His concern is that the new roadmap could build “molecules of blocks” that would create a monopoly in the retail end of the FX market.
BDC operators, though they have vaguely distanced themselves from black market dealers, are closely associated with market speculation, market manipulation and, most importantly, entrenched informality, a challenge that has frustrated every effort in the book to check their activities and bring them to conformity.
These added to the round-tripping tendencies of the banks, and experts have insisted that the CBN would need more sophisticated work tools, manpower and a real-time transparent reporting template to monitor and tam the ancient monsters masquerading in the FX market.
The CBN may appear overwhelmed by the challenges, but it may be far from sliding into navel-gazing. Weekly, or monthly, there are one or two new rule-based documents handed to the authorised dealers.
Last week, it introduced two new guidelines that are expected to increase the level of transparency and increase governance practices at the board and executive levels of firms operating in the market.
First, it announced what it termed the Electronic Foreign Exchange Matching System (EFEMS) transactions in the NFEM. The bank said the system would enhance governance, and transparency and facilitate a market-driven exchange rate that would be accessible to the public.
“This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight capabilities to regulate the market effectively. Authorised dealers will subsequently conduct all foreign exchange transactions in the interbank FX market on the EFEMS approved by the CBN where transactions will be reflected immediately,” a statement by the bank said, adding that a test run of the platform would start in November.
Also last week, the Bank unveiled a draft Nigerian FX Code Book. This document would specify a set of standards for transactions in the Nigerian FX market when adopted to continue “efforts to promote integrity and efficient functioning” of the space.
The Bank said the code, a set of ethical standards and principles, has been developed in response to the emerging changes. The exposure draft, which will take effect from December 31, 2024, with market inputs expected to reach the Bank on or before October 18, dwells extensively on six guiding principles – ethics, governance, execution, information sharing risk management and compliance as well as confirmation and settlement processes.
At the weekend, affected bodies and individuals were still studying the provisions of the new documents. Without pre-empting how the implementation would turn out, a few stakeholders insisted the CBN would need to take a step beyond creating new rules to build an efficient market – the ultimate goal of the reform that started last year.
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