CBN, BDCs on collision course as FX black market premium widens
• Operators given till tomorrow to comply with new guidelines
• Premium on black market inches to 20% as against CBN’s 2.5% directive
• Local currency plunging to N950/$ at parallel market
• ABCON demands for access to official market
• Firms seek new licences as CBN prunes down operators
• Naira moves from third worst performing currency in Africa to first
Bureau de Change (BDC) operators may be on a collision course with the Central Bank of Nigeria (CBN) over market infractions, market intelligence suggests.
Already, there is an engagement between the regulator and the Association of Bureau de Change of Nigeria (ABCON) over unmet expectations, The Guardian, was reliably informed yesterday.
The CBN had previously openly and privately chastised the operators over what it considers sabotage and market manipulation, an accusation that has been equally dismissed as misplaced by the operators.
Whereas the CBN tends to hold the registered operators, who were pegged at 5,689 as at December 2021 after which fresh registration was frozen to account, ABCON has consistently pushed back on the narrative, charging the apex bank to do the hard work of separating the chaff from the wheat.
Yesterday, the President of the association, Dr Aminu Gwadabe, repeated the same refrain, noting that the inability to draw a distinction between the activities of market speculators and registered ABCON members is a major source of conflict in the sector.
The narrative could play out again prominently from tomorrow after the deadline that the CBN has handed down to ABCON to enforce its recently-refreshed guideline.
Recall that the Bank recently announced a refreshed template “in a bid to enhance the efficiency of the Nigerian Foreign Exchange Market”. The document contained some reporting and trading rules believed could bring sanity to the chaotic market many economists, including what Prof. Bongo Adi of the Lagos Business School, told The Guardian is a world of its own in currency trading around the world.
Under the new framework, the trading margin by BDC operators is capped at the range of -2.5% to +2.5% of the Nigerian Foreign Exchange Market (a recent creation from the old order) window’s previous day weighted average.
Whereas filing of returns has always been a rule though flagrantly undermined by the recalcitrant roadside dealers, the new rule requires the operators to submit daily, weekly, monthly, quarterly and yearly returns through what the CBN called the upgraded Financial Institution Forex Rendition System (FIFX).
The circular emphasised that failure to comply could lead to licence withdrawal. As in the case of tax returns, operators are, by the rules, required to file returns as part of the broader efforts to restore sanity and build a proper reporting culture.
According to information from multiple sources, which were confirmed by Gwadabe, the CBN followed up with a letter, giving members up to August 31 to comply with the new directive or face sanctions.
Less than 48 hours before the timeline, market intelligence suggests a wide gap between realities and the regulator’s expectations. For instance, the stability intended by the margin cap is still off the target. As at press time, foreign exchange (FX) end-users were still paying over 19 per cent premium at the black market to access the extremely scarce hard currencies for personal or business transactions.
In absolute terms, parallel market rates were quoted at between N910 and 920 per dollar at the parallel market – in Lagos, Ibadan and Abuja – which were monitored by The Guardian. In rare cases, dealers were offering the greenback at N930/$.
Whereas extreme quotes could be dismissed as speculative, at the closest rates to the actual parallel market figure – online real-time peer-to-peer platforms, a dollar was exchanging for N928 at noon.
The figures at the alternative market are close to 20 per cent off the official market, which closed at N772/$ on Monday, and over 15 per cent above the margin set by the CBN.
The ABCON President told our correspondent that it has trained its members in the rendition of reports and that it was on course to meet the goal set by the market regulators. But Gwadabe’s assurance stops at official efforts.
Investigations suggest that beyond the representatives of the BDC firms who ABCON and CBN relate with, there are thousands of hitherto idle individuals now masquerading as DBC operators but know nothing about the rules much less their compliance.
“They work under the cover of firms who do not have the resources to train them in compliance issues. Some of the individuals are not even teachable. How do you send rules for those individuals and think you have done your job?” a trader queried.
On funding, Gwadabe, during a previous telephone conversation, said the CBN could be waiting till the August 31 deadline to come up with a funding modality, revealing the expectations of some of the players.
In another conversation, yesterday, he said funding could be in the form of giving BDC operators access to the official window, diaspora remittance, international oil companies (IOC) and other funding streams to enable the operators to contribute to the growth of the market and increase liquidity.
He admitted that the CBN is kneecapped by illiquidity, hence direct funding could be unrealistic. But he insisted that efforts to find a sustainable solution must exclude the sub-sector, which is often seen as the bedrock of instability in the market.
In recent times, the banks have been actively paying in the market from the backdoor, an unethical behaviour the CBN has frowned at but restrained, for whatever reason, from sanctioning.
The convergence pronouncement came with an expectation that narrowed arbitrage would reduce the incentive for round-trip transactions and inflow through informal sources. Indeed, the arbitrage narrowed to almost zero about two weeks after the harmonisation, raising the hope of improved liquidity in the official market.
But fresh data and facts point to a potential loss of the gains of convergence. For instance, informal remittances are said to be rising on the bank of high operational cost of transfer through international money transfer organisations (IMTOs).
Western Union, for instance, charges as much as 11 per cent on transferred funds, according to recent transactions reviewed by The Guardian. Cheaper options, such as MoneyGram and Ria, are grappling with operational glitches with recipients visiting dozens of banks before successful withdrawals.
A banker told The Guardian that most agents of MoneyGram have lost their rights for failing to comply with the rules, some of which are ridiculous. A rule requiring an agent to pay a recipient to the last cent implies that most receipts would need to open hard currency accounts with the few banks that are still on MoneyGram before they have access to their funds.
“These ridiculous rules affect timely transactions. Those ‘guys’ are becoming stricter by the day. So, a lot of people go through unofficial routes to send their money,” a customer, who has found a ‘better’ in demand-supply matching many bankers are involved in as a side hustle, narrated.
“If I want to send money home, I simply call my contact to match me with anybody who has a need for dollars in the United States. Sometimes, before you call, he already has somebody who wants to transact. The commission I pay is next to nothing, and I get the black-market rates for conversion. It is faster and cheaper than going through formal money platforms,” he added.
Already, these practices are shrinking what comes in through the formal routes and taking the shine off market liberalisation. Last month, FMDQ spot and derivative markets recorded a 33.4 per cent week-on-week drop in transactions from $619.2 million recorded the previous week, a reversal of the trend seen shortly after the convergence announcement.
Experts said the scanty inflows are the reason the CBN could find it difficult to intervene in any window as speculated by especially foreign analysts. But there is also a strand to the debate on regulation and intervention. For one, some have questioned the morality of controlling what you do not own in the discussion about the ‘return’ of BDC operators.
The Director of Communication of the CBN, Isa Abdulmumin, would not comment on the feasibility or absurdity of giving BDC operators some form of support.
However, a reliable source foreclosed the possibility and how such a possibility aligned with the new FX management approach. The source confirmed that there has been pressure and communication between the regulators but disclosed that the CBN was not considering any form of funding for the market.
“They hold our licences and it is expected that we regulate their operations. This is the premise of the new operational guides the CBN issued to the operators. However, I am not aware that funding is being considered. Expectation is alright but there is already the need to consider what is doable. Considering both availability and other factors, funding is far from the reality,” the sources said.
Adi, a professor of economics, said it was absurd to query an attempt to regulate BDC operators on the basis that the CBN does not fund them, saying the query reflects the poor understanding of the free market and the absurdity of Nigeria’s system.
“We should understand the importance of exchange rate in the macroeconomic stability of any country. The critical thing about macroeconomic stability is the exchange rate; no country toils with the exchange rate or allows anybody to toil with it. In the United States, everybody waits for the Treasury to set the rates,” he said, insisting that the exchange is often centrally managed to prevent autonomous manipulation as it has been in Nigeria.
Hence, Adi said funding is secondary as regards BDC regulation, insisting that nobody should be allowed to do anything that would dramatically change the value of naira even if such a person independently sources the money he uses.
As the regulation circular breeds all manners of misunderstanding, The Guardian learnt that there is ongoing lobbying by promoters of new BDC firms for registration even as the Central Bank is reviewing the existing list for possible de-registration. The review is said to have preceded the circular release but the metrics contained in the new template could be used to drastically prune down the t 5,689 registered firms.
Meanwhile, the crisis of the past months may have earned naira the infamous title of the worst African-performing currencies this year. According to a list compiled by Bloomberg, naira, Angolan Kwanza and the Egyptian pound lead top 10 worst-performing currencies year-to-date (YTD) with -40.7 per cent, -39.5 per cent and -20.6 per cent fall against dollar.
Interestingly, all the laggards are African currencies. The rest are the Congolese Franc, Liberian Dollar, Kenyan Shilling, Sierra Leonean Leone, Ghanaian Cedi, Rwandan Franc and South African Rand.
Last year, naira ranked third worst-performing currency behind the Zimbabwean Dollar and Sudanese Pound in Africa. It was the 11th worst-performing currency in the world, according to Hanke.
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