Some of the main aims for the sales of forex to operators of licenced Bureau de Change outlets was to ease pressure on supply and firm up the naira; but that has been defeated, MARK ITSIBOR reports
From Spain to China, London to South Africa, the ideal practice is that Bureau de Change (BDCs) are supposed to be formal institutions licenced by the central bank, with licencing guidelines, defining their mandate. In Nigeria, it is supposed to be the retail end of the market to moderate prices at that level because of the shocks the country constantly sees. That segment of the market was initially regarded as very little, insignificant; “so we feel it is not going to really impact on the other parameters of exchange rate,” director, monetary policy department of the Central Bank of Nigeria (CBN) Dr Hassan Mahmud said.
But recent experiences have shown there was a need for the central bank to come in to put things in perspective and allow the market system to operate in a very efficient manner. It became a distortion or friction within the market’s smooth operation mechanism.
There is litany of cases to prove that Bureaux de Change have become willing agents for illicit financial transactions. Some of the reasons governor of the CBN Godwin Emefiele cited for discontinuing the sale of forex to BDCs was because of what he called the unwholesome business practices of the BDCs, which he said had continued to put enormous pressure on the Naira.
The CBN governor said BDC operators have turned themselves to conduits for illegal financial flows working with corrupt people to conduct money laundering in Nigeria. “They have turned themselves away from their objectives. They are now agents that facilitate graft and corruption in the country. We cannot continue with the bad practices that are happening at the BDC market,” he said.
Not a few people would agree with Emefiele after all. The aim for the direct sales of forex to the currency-exchange retail outlets was to ease pressure on supply and firming up the naira; but that has failed. Despite the injection of billions of dollars into the parallel market through the BDCs, the value of the naira kept plummeting due to rent-seeking activities of the operators.
Millions of dollars are reportedly laundered through the BDCs and other institutions on daily basis. For the World Bank, there is a convergence of corrupt funds, smuggling, terrorism and drug trafficking in countries that are slipshod in curbing money laundering. The World Bank had said the economy, society and ultimately the security of countries used as money laundering platforms are all endangered.
With that in mind, with the fact that the BDCs have not bothered to prove otherwise, there are concerns that terrorists, bandits, ethnic militias, smugglers and industrial scale treasury looters now have a field day, using the BDCs as agents of money laundering for unethical practices.
According to a report by Brookings Institution, Nigeria and three other African countries – Ethiopia, South Africa, DR Congo – accounted for over 50 per cent of the $1.3 trillion of illicit outflows from sub-Saharan Africa between 1980 and 2018.
“The link is so strong and it is becoming more intensified and the bank needs to at least address substantial parts of those distortions coming into the economy. One big area that was a major issue was the behavior in the BDC segment of the market. It got to a stage that you could not differentiate between the BDC market or BDC rate and the parallel market rate or the black-market rate,” Mahmud said in an interview recently.
In the eyes of many industry watchers, the recent decision by the central bank to stop sales of forex to the currency retailers ought to have come before now. There had been suggestions that the CBN should tidy up its foreign exchange management posture that was seen in some quarters as denying forex to critical productive sectors and facilitating illegal arbitrage.
Economic analyst, Stephen Kanabe agrees with Mahmud that with the banking system or the commercial and deposit money banks, monitoring is going to be more efficient, their transactions can be seen every day and you should expect some level of responsibility given even the capital base and the professional base of those operating in that system.
While some would rather waive the latest suspension of dollar sales by the central bank as one that was made in 2016 but was reversed, the CBN says there will be stricter monitoring this time. “The banks themselves know what is on their shoulders now, looking at where we are coming from in terms of taking this off the BDC segment because of the distortions and irregularities and arbitrages that we saw in that market.
The banks know that this is a more serious burden on them and it’s something that has to do with their reputation and the fact that the central bank has enough tools within its purview to monitor those banks and also penalise those that also fall off the line. So, in terms of the efficiency of it, because we have also emphasised that these flows will go to the bank, the supply side as much as possible will be taken care of,” the bank said.
The central bank has told everyone that it will try as much as possible to meet that side and then the transparency of it will also improve for even other investors that want to have access to foreign exchange. So, in terms of the results, it expect to see a better outcome in terms of the efficiency, the delivery of foreign exchange, transparency in the transactions, the documentations that would be required would be verifiable by both the regulators and even the banks that are supposed to disburse those funds.
Between November 2020 and July, the BDCs have earned rent of about N300 billion from the illicit margin that was illegally created by their operations. The BDCs and their allies claim that the CBN’s actions will result in the collapse of the BDCs and the loss of over 40,000 direct jobs linked to their operations. They also highlight that many persons with genuine transactions for which the CBN refuses to provide forex, will keep patronising the parallel market leading to increased rate pressures on that market which unfortunately serves as the marker for most economic transactions (even economic actors who source Fx at NAFEX rates turn around to sell their products based on replacement pricing linked to the parallel market rate). In the short term, this pro-BDC gang is likely to be “on point”. How short the term is will depend on the will and additional action by policy makers.
Professor of Capital market at Nasarawa State University, Uche Uwaleke said the decision by the CBN to stop forex sales to BDCs is in the best interest of the Nigerian economy.
He said “it is consistent with the move by the CBN to unify exchange rates and bring more transparency to the forex market.” Exchange rate unification is in line with the IMF and World Bank’s recommendations and so improves the country’s profile and credit standing before international financial institutions. It signifies that the country is serious in her reform efforts. “It will slow down the rate of depletion in external reserves,” he added.
“The move is likely to check round tripping of forex and reduce supply of forex in the parallel market. Further, speculative demand for forex is also likely to reduce. I am aware that BDCs have been accused of being vehicles for bribery and corruption. This will likely reduce.”
However, there are insinuations that the measure will wipe out the employment opportunities created in the sector with over 5000 BDCs with several others waiting to be licensed. Also, the gap between the AFEX rates and parallel market rates is likely to widen further with dollar shortages in BDC and parallel market segments, Uwaleke said.
A development finance researcher, Sam Ekpuk says the CBN should go further and request the relevant agencies to investigate and prosecute economic saboteurs among the BDC operators as a deterrent to criminal activities but I would focus here on the issues within the purview of the apex bank.
The CBN appears to have earlier made up its mind to sanction those who would be found guilty of manipulating the process. Speaking to reporters when he announced the ban last month, Mr Emefiele said “We will deal ruthlessly with Nigerian banks that deal with illegal BDCs and we will report foreign organisations patronising them.”
The onus is now on the commercial banks to live up to their responsibilities in meeting customers’ demand.
Professor of Economics at the Olabisi Onabanjo University Ago-Iwoye, Ogun State, Sheriffdeen Tella, is among those who have urged the banks to legitimately sell forex to customers to enable the exchange rate of the naira to the dollar appreciate.
He has a supportive voice in Uwaleke who said going forward, “the CBN should ensure that purchase of forex via the banks which will now increase is made stress free with minimal documentation. This is what pushes people to the parallel market.”
According to Tella, the spike in the price of the dollar is a depreciation which is expected. “At the initial stage that we are, the exchange rate will depreciate because there will be hoarding of forex by BDCs and panic demand by industries and other importers.
There is high hope that the measures taken by the CBN would end rent seeking, ease pressure on supply and firming up the naira against the dollar.