The Central Bank of Nigeria has issued a new circular on Friday announcing that it has given Bureau De Change operators (BDC) permission to buy forex sold from International Money Transfers.
The circular titled “Sale of Foreign Currency Proceeds of International Money Transfers to Bureaux De Change Operators” read in part that “Authorized dealers who are agents of International Money Transfer Operators are hereby authorized to sell foreign currency accruing from inward money remittances to licensed Bureaux De Change Operators (BDC’s) with effect from the date of the circular.”
The Central Bank also instructed that proceeds of the remittances shall be sold only to the retail end of the market.
Implication
What this means is that proceeds from forex inflows such as Western Union or Money Gram can now be sold to the BDC’s. Before now banks were under instruction to sell most of the forex back to the CBN whilst paying beneficiaries in Naira. With this new instruction, beneficiaries will still collect their money in Naira but banks can now sell the dollars directly to the BDCs helping creating liquidity at the retail end. Foreign remittances to Nigeria was thought to be around $21 billion in 2015 alone.
Analysts inform Nairametrics that the CBN has taken this decision to trigger a flow of forex supply to the retail end of the market which has been starved of dollars since a rash of CBN policies earlier in the year that has done more harm than good. Retail buyers of forex who need it to pay for school fees, travel on summer vacations have been shut out of the forex market making them to rely heavily on the parallel market to meet their demand. This has expectedly driven up cost of the dollar in the black market exchanging for as high as N379. The premium between the official rate and the black market rate is now over N70 to the dollar.
So rather than have banks stash their vaults with dollars they can’t sell, they pump the money into the retail end of the market hoping that it will drive down the price of the dollar in the black market
Banks back in play?
This decision has its own risk considering that we have been here before. Operators inform Nairametrics that at the policy was in place for banks to sell forex directly to BDC operators, staffs of Treasury department of most commercial banks use this as an opportunity to make “fast bucks”. An operator explained to Nairametrics that rather than sell dollars at the prescribed official rate (before floating), Treasury staffs will sell to BDC operators at an extra premium and then pocket the difference.
For example, if the approved rate was N200 they will sell to BDCs at N220. BDC who were not willing to play ball will be informed that there are no dollars to sell. The willing BDC who agree to play will now have to issue two cheques, one at the rate of N200 and the other N20. The former will be in the Bank’s name whilst the latter will be in the name of a personal account produced by the Treasury Staff.
Whilst this practice worked perfectly well when the exchange rate was pegged we inquired if it could work now that the currency is floating. The operator informed Nairametrics that it was still possible because of the currency disparity between the interbank market and parallel market creating an incentive for arbitrage. The “Treasury guys are just too powerful and can still decide who they want to sell to” we were informed.
Whilst this latest move by the CBN may help reduce the scarcity of dollars in the retail end of the market, the fact that the rate disparity still exist remains a big problem. Another issue pointed out is the 41 banned items. With this ban still in place, it is believed that pressure will still be placed in the black market as hardline importers will still rely on that market to fund their transactions. Whilst this holds true, Nairametrics believe the impact is not as huge as suggested. The current depreciation at the black market we believe is mostly due to parents scrambling to get forex for their summer holiday.
The circular titled “Sale of Foreign Currency Proceeds of International Money Transfers to Bureaux De Change Operators” read in part that “Authorized dealers who are agents of International Money Transfer Operators are hereby authorized to sell foreign currency accruing from inward money remittances to licensed Bureaux De Change Operators (BDC’s) with effect from the date of the circular.”
The Central Bank also instructed that proceeds of the remittances shall be sold only to the retail end of the market.
Implication
What this means is that proceeds from forex inflows such as Western Union or Money Gram can now be sold to the BDC’s. Before now banks were under instruction to sell most of the forex back to the CBN whilst paying beneficiaries in Naira. With this new instruction, beneficiaries will still collect their money in Naira but banks can now sell the dollars directly to the BDCs helping creating liquidity at the retail end. Foreign remittances to Nigeria was thought to be around $21 billion in 2015 alone.
Analysts inform Nairametrics that the CBN has taken this decision to trigger a flow of forex supply to the retail end of the market which has been starved of dollars since a rash of CBN policies earlier in the year that has done more harm than good. Retail buyers of forex who need it to pay for school fees, travel on summer vacations have been shut out of the forex market making them to rely heavily on the parallel market to meet their demand. This has expectedly driven up cost of the dollar in the black market exchanging for as high as N379. The premium between the official rate and the black market rate is now over N70 to the dollar.
So rather than have banks stash their vaults with dollars they can’t sell, they pump the money into the retail end of the market hoping that it will drive down the price of the dollar in the black market
Banks back in play?
This decision has its own risk considering that we have been here before. Operators inform Nairametrics that at the policy was in place for banks to sell forex directly to BDC operators, staffs of Treasury department of most commercial banks use this as an opportunity to make “fast bucks”. An operator explained to Nairametrics that rather than sell dollars at the prescribed official rate (before floating), Treasury staffs will sell to BDC operators at an extra premium and then pocket the difference.
For example, if the approved rate was N200 they will sell to BDCs at N220. BDC who were not willing to play ball will be informed that there are no dollars to sell. The willing BDC who agree to play will now have to issue two cheques, one at the rate of N200 and the other N20. The former will be in the Bank’s name whilst the latter will be in the name of a personal account produced by the Treasury Staff.
Whilst this practice worked perfectly well when the exchange rate was pegged we inquired if it could work now that the currency is floating. The operator informed Nairametrics that it was still possible because of the currency disparity between the interbank market and parallel market creating an incentive for arbitrage. The “Treasury guys are just too powerful and can still decide who they want to sell to” we were informed.
Whilst this latest move by the CBN may help reduce the scarcity of dollars in the retail end of the market, the fact that the rate disparity still exist remains a big problem. Another issue pointed out is the 41 banned items. With this ban still in place, it is believed that pressure will still be placed in the black market as hardline importers will still rely on that market to fund their transactions. Whilst this holds true, Nairametrics believe the impact is not as huge as suggested. The current depreciation at the black market we believe is mostly due to parents scrambling to get forex for their summer holiday.
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