Last week, the Central Bank of Nigeria (CBN) in an effort to stabilise the foreign exchange arket and reduce the premium between the parallel market and the official market, issued a circular to the Bureau-De-Change operators in the country, stating new operational guidelines.
This is coming two years after Godwin Emefiele, the former CBN governor, announced the termination of sales of foreign exchange to that segment of the forex market. The announcement was made amidst an acute FX shortage in the economy and continuous pressure in the parallel market, which has created wide premium between the official I&E window and the parallel market to about c.18% as of 17 August.
The CBN in the released operational guidelines for the BDC segment stated an allowable spread of -2.5% to +2.5% of the Nigerian FX Market Window Weighted-Average-Rate (WAR) of the previous day. The guideline also mandated a rendition of the statutory periodic report (daily, monthly, quarterly, and yearly) on the Financial Institution Forex Rendition System (FIFX). The CBN notes that violation of these rules may attract sanctions such as the withdrawal of the erring operator’s license.
Earlier, the CBN had noted that in a managed-float FX regime, while market forces i.e demand and supply reign, government can occasionally when needed step in as a player (buyer or seller) and not as a regulator to stabilise the market. We observed a positive reaction to the US$3.4bn prepayment secured by NNPC from AfeximBank.
Considering current net reserves levels as glimpsed from the CBN reports released recently, it is unlikely the CBN can ramp up intervention levels at the I&E window in the near term as inflows remain tepid.
In our view, beyond resumption of sales of FX to BDCs which we believe will be a fall out of these new guidelines, we believe the CBN also needs to raise the ban on many items barred from sourcing FX from the official window so as to reduce the demand going to the parallel market.
That said, we opine that such secondary fixes are only sustainable in the short term. There is an urgent need for structural reforms aimed at improving the supply of FX. We also note that these new regulations by the CBN are only sustainable if the CBN supplies FX to the BDCs. It would not be ideal to fix a spread for the BDCs when there is no control on the price at which they source FX and many of the operators have noted that they will fail to comply if the CBN fails to supply FX.
CSL Research
