Emefiele’s Forex to BDC Ban; A Circular Dance
On July 27, the Premium Times reported that the Governor of the CBN, Godwin Emefiele, in a media briefing on the outcome of the Monetary Policy Committee (MPC) meeting, said the bank has ended the sales of forex (foreign exchange, e.g dollars) to Bureau De Change (BDC) operators, saying the parallel market has become a channel for which corruption practices take place. In a live TV broadcast, Mr. Emefiele said, “We are concerned that BDCs have allowed themselves to be used for graft.”
A media outlet like Guardian Nigeria sounded triumphant. It led with the headline, “In rare courage, CBN weakens BDC operations, stops FX funding.” At first glance, this is a policy that is long overdue. If the CBN gives you dollars at the official rate of N410 and asks you to sell to the public at, say, N450, and you are seen selling it at N500, it’s moot to argue that the CBN has done anything wrong.
To replace the BDCs, the CBN has mandated banks to immediately commence the sale of foreign exchange to customers by creating dedicated teller points in their premises. It also said that customers who are aggrieved at not being attended to upon presenting the required documents should report to the federal bank through a toll free number: 0700 22 55 226 or email: email@example.com.
“This measure is not punitive on anyone, but it is to ensure the CBN is able to carry out its legitimate mandate of serving all Nigerians,” Mr. Emefiele said.
But before we get ahead of ourselves, what exactly did we even need the BDCs for in the first place?
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History of the BDC
Right now, Nigeria has at least 4 exchange rates — NAFEX, IEFX, IATA, and Parallell. Not to derail this article, I will not delve into what the first three mean, but it is interesting that while for a long time they all had different exchange rates, three of them have recently converged closely. As at May ending, NAFEX and IEFX are N410, and IATA is N402. Close enough. IMF has several times urged Nigeria to scrap its system of multiple exchange rates in order to revive its economy. (3)
The only exchange rate that has not bulged is the parallel market, often called the black market rate, which as at May ending was N502.
Where did the parallel rate come about? It is said that the current parallel market system being operated started in 1989 by the Ibrahim Babangida regime. The major objective was to provide access to foreign exchange for small-scale users. That is why before the recent ban, the maximum sum given to each BDC was $20,000 per week, and they were instructed not to sell more than $5000 to one person. They are meant to operate like mobile banking agents. You ought not to disturb the banks if you need $2000 to buy machinery. BDCs are close to the citizens so that means they are easily accessible. However, the BDCs started being abused starting from General Sani Abacha. He enacted policies that led to the setup of a lot of BDCs. In 1997, while he pegged the official exchange rate at N20, he allowed the parallel market to sell at N80, and it did sell for as high as N88 during this period. It was a great incentive for arbitrage or ‘spread’ like many people like to call it. In one week, you are guaranteed to make 400% of our capital. It’s such an easy business. Remember in 2016 when the ousted Emir of Kano and former CBN governor, Muhammad Sanusi said, “With my background in the banking sector, and now a royal father, I can sit in my garden and make billions through forex market without sweat.”? Many people have said he was referring to the spread.
It became quite bad in 2016 because according to Emefiele himself, while the CBN was selling dollars to BDCs at N197, they were selling to the public at N250.
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Blame the Game, not the Players
In his book, Basic Economics, the economist Thomas Sowell says, “One of the ways of understanding the consequences of economic decisions is to look at them in terms of the incentives they create, rather than simply the goals they pursue.” The incentives created by the pegging of the dollar is that it increased the number of BDCs.
That’s why operators increased from 74 in 2005 to 2,700 in 2016 and now around 5,500. The CBN says it receives at least 500 new applications for BDC licenses every month. It was amusing when Emefiele said, “What is in this business that everybody must be in it?” He must be trolling. The business is so lucrative that politicians and those close to the government set up BDCs at will. President Muhammadu Buhari himself revealed that some directors in CBN owned BDCs. And because each BDCs is only limited to $20,000 per week, what many do is set up a lot of BDCs and get multiple $20,000 every week.
The CBN sells to the BDCs at N410 and they in turn sell to the public at N500. That’s a N90 spread and N1.8 million profit weekly, amounting to N7.2 million per month. Or A N14.4 million profit for a person who owns 2 BDCs. This means that in 5 months, a BDC owner would have been able to recoup the N35 million he paid to get a license. (9) Fantastic investment.
So you see why I say that the CBN governor is trolling. You create a system like this and then ask that people not game it. That’s unrealistic.
Anyway, sales of forex to them have been banned, so all is well, right? Actually not so fast.
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A Movie We Have Seen Before
This is not the first time the CBN is banning the sale of forex to BDCs. On January 11, Godwin Emefiele gave a similar media briefing saying that, “Whereas the Bank has continued to sell US Dollars at about N197 per dollar to these operators, they have in turn become greedy in their sales to ordinary Nigerians, with selling rates of as high as N250 per dollar.” (10)
Did you notice the similarity with what is happening now? What became ironic was the same CBN started selling to them in November of the same year. Emefiele started selling to entities he called ‘greedy’, ‘money laundering agents’, and those who engage in ‘rent-seeking behavior’. The question is, why?
It’s vecause the Naira went from N250 that the CBN governor was complaining about to as high as N500. So the apex bank needed to pump forex into the parallel market. Supply vs demand. The more the supply, the lower the demand. Now, when you can make more money in the parallel market, there is incentive for you to take from the CBN and not use for the purpose for which it was given. So manufacturers would take funds from the CBN and instead of importing machineries and all, they would forge receipts of purchase of these imports and sell to the black market. And that in turn put pressure on the official rate.
In one of my posts, I broke down what the foreign reserves means. Nigeria does not print dollars. Nigeria is only allowed to print Naira. That means that for the CBN to get the dollars it sells to everyone, it must receive it from somewhere. When it gets the dollars it keeps it as foreign reserves. 95% of all foreign exchange that Nigeria earns is from oil. This means that the higher the price of oil, the more foreign exchange the CBN has. One of the reasons for the 2016 forex ban to BDC was also because of the low price of oil which meant that the foreign exchange reserves were being depleted. Nigeria has agreed that it needs $30 billion as foreign reserves for it to meet its import and foreign debt obligations (i.e. funds to give to those who want to import into the country and funds to give to institutions it owes abroad). Anything below that figure spells trouble. If foreign currency is low or absent then a country is in a crisis. You never want to be in that position.
For those who follow the Nigerian economy closely, Nigeria is predictable. In 2015, the CBN spent $4 billion on forex sales to BDCs and by 2016, the foreign reserves had fallen to $28 billion, so it was predictable that what happened to the BDCs would happen. And to further that point, as soon as oil prices rebounded and the parallel rate widened, the CBN commenced sales again. Dollar sales to the BDCs got to $6 billion in 2017 and $13.6 billion by the time 2019 was winding down.
Then entered coronavirus. And the world went into silence. Foreign inflows dropped drastically. Oil revenue dropped drastically. Non-oil revenue dropped drastically. And CBN came out with its song again: Ban of forex to BDCs. For most of last year, the CBN didn’t sell forex to BDCs. Why? You know. Of course, they gave it another excuse: BDCs are not supposed to gather around people and sell to them due to social distancing. But it’s easy to decipher the real reason: low foreign reserves.
Hopefully, it’s now clear what the CBN is doing. The CBN wants to have the foreign reserves not be depleted so it looks for all kinds of reasons to stop sales to BDCs. Actually, it’s not just sales to BDCs. If you go through the CBN website, you will see that sales across board has been low. So while the CBN sold $11 billion worth of forex to the different exchanges in the first quarter of 2021, it could only spend $4 billion in the same timeframe in 2021.
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How Is It Gonna End?
Mr. Emefiele’s latest media briefing seem to indicate that he is serious about banning BDCs. His grouse is not misplaced. As explained, the players are gaming the game. However, the elephant in the room is that the CBN is not providing viable alternatives. The CBN has mandated the banks to set up teller points, yet insists that only those with documentations will be attended to. In other words, those who needs forex outside of those on the CBN list have to source it elsewhere.
And where they go is the parallel market. Would the bank bureaucracies allow for effectiveness? The CBN may have released $200 million to banks a day after the BDC announcement but how long is it going to last? Nigerians have an astonishing appetite for the dollar and restrictions on what to use the dollar for has been shown to lead to the decline of the value of the Naira.
So having read the history of Nigerian economic policies and being a keen follower of the Nigerian economy, I predict that the Naira will continue to lose value because of the ineffectiveness of the banks, the incentives for ‘friends’ of the banks to profit by selling in the black market, the need for Nigerians to preserve their hard-earned income by hoarding the Naira.
In 2016, when the CBN went this route, the Naira ballooned from N250 to N500. As soon as the CBN announced the ban a few days ago, the black market rate jumped from N498 to N525. I just checked abokifx and it’s down to N515 now, but I posit that it’s a dead cat bounce. I have given the reasons why this is inevitable above.
At what point will the CBN blink and start selling to the BDCs again? When the Naira gets to N550? N600? N700?
On November 21, 2020, when folks were complaining of how low the Naira has fallen, I posted on my wall,
“In Nigeria, the dollar is never too costly to have. And I’m saying this with a dollar being N479 today.”
Would you like to bet that today’s rate of N515 is cheap compared to what is coming? The history of Nigeria’s economic policies would tell you that would be unwise.