10, 2021 / 05:53 AM /OpEd by Tosin Ige, Proshare Research /
Header Image Credit: Ecographics
Past governments in Nigeria have sought to respond to the
country’s balance of payments challenge by creating a legal parallel (or dual)
foreign exchange market to avoid the short-term effects of a depreciation of
the Naira on domestic prices while retaining some degree of control over
capital outflows and international reserves. However, as the situation turns in
the wrong direction, the government begins to trade blames on the market
In January 2016, the Central Bank of Nigeria (CBN) cut
sales of FX to BDC operators and revised their operational guidelines for
similar reasons stated as in the last two MPC meetings. On March 24, 2020, the
CBN also suspended the sales of FX to BDC operators to avoid excess liquidity
in the system due to a reduction in travels and demand for foreign exchange by
travellers at the peak of the COVID-19 pandemic. The two instances were
transitory as the CBN soon returned to the status quo. Nonetheless, these
instances show the CBN has long been in the business of chasing the symptoms
instead of the causes.
Given the consistent depreciation of the naira against
major foreign currencies since 2015 and its recent sharp decline, the CBN
essentially trailed the same route as was done in previous instances with the
BDC operators and as the FGN did when its clampdown on telephone business
centres during the 80s and 90s when there were shortages of telephone lines in
Nigeria. The CBN is currently hunting the channels, speculators, and platforms
rather than the root cause.
My fear however is that what started as an FX
Conundrum has morphed into a currency crisis that could lead into a financial
crisis; if remedial measures and forward looking strategies are adopted. We
have quite a lot of empirical evidences to back this up and the 1997 Asian
financial crisis comes to mind.
Sadly, from what we saw from the most recent CBN press
conference, their actions continues to accelerate and hurtle us towards the
blowout point. It’s almost like a death wish on their parts. The higher rate of
decline will attract more sellers and the
the rate of decline accelerates even more and goes through the roof.
So, what then shall we do?
Much as we would love to do something, my personal
take is that the macro forces are now in play and there’s very little
individual forces can do, except for those individuals still with some
semblance of “power” – whatever hue that may take. I think the trigger point
will be around the N700/$ mark, which then makes a N1000/$ rate inevitable and
happen faster; by which time the CBN will be overwhelmed. The tsunami will now
move towards other nodes of the system and they too will be overwhelmed one
after the other. Sadly, our worst fears may be about to be ealized. I pray I am
off-target with theses probable model outcomes. So, lets take a look at the
arguments from actors.
The CBN Argument
On July 27, 2021, the CBN argued that gross external
reserves have remained strong even though there was a decline from 34.18
billion dollars in May to 32.78 billion dollars in June 2021, providing
adequate cover for up to 6.13months of imports of goods and services against
short term shocks in the foreign exchange market. The CBN noted that the naira
exchange rate at the I&E window has somewhat been supported by its
noteworthy policy adjustments to preserve the value of the naira, ensure
stability in the foreign exchange market, and boost the external reserves. It
observed that the naira exchange rate has only depreciated marginally by 0.02
percent from N410.00/US$ at the end-May 2021 to N410.10/US$ at the end-June
2021 at the official window but depreciated significantly on the other windows.
The depreciation, according to the CBN, was driven mainly by the rising dollar
demand from both genuine commodity importers and illegal hoarders using the Bureau
De Change (BDC) and parallel market windows. Such activities often overwhelm
the supply of dollars (CBN Communique 137, 2021).
Thus, given that the naira may remain under pressure
in the medium term as the global economy reopen and the illegal activities of
the unofficial windows continue, the CBN Governor, Godwin Emefiele, stated that
the CBN would discount the sales of FX to the BDC, and would also no longer approve
BDC license applications (Proshare Research, 2021). According to the CBN, the
apex bank has been having running battles with the BDC operators who were
unwilling to yield to the rule of the game. The bank also noted that the BDCs
have consistently frustrated its effort and policy to strengthen the naira against
the dollar. According to the CBN, BDC Operators’ illegal dealings account for
80% of the Nigerian FX problem (AbokiFX, 2021).
With the CBN’s decision to discontinue weekly FX sales
to BDC operators, it expected more stability and transparency in the FX market.
The CBN advised commercial banks to sustain the implementation of policy
measures aimed at sanitizing the FX market and also vigorously enforce FX
regulations to ensure that all legitimate demands for FX are met. The CBN also
directed the commercial banks to set up FX Teller points in all branches to
ensure the direct sale of FX to buyers.
Before the CBN decided to halt FX to BDC operators,
the CBN sold $20,000 weekly to over 5,000 BDCs amounting to over US$100m weekly
and US$1.57bn annually.
On September 17th, 2021, the CBN in
recognition that the discontinuation of weekly FX sales to the BDC operators
had no significant effect on the FX rates at the unofficial windows, the apex
bank went further to clamp down on the sources of the parallel market rates. The
parallel market rates posted on an online FX platform – Aboki FX.com
showed that the rate opened at N565/US$ and closed N562/US$ on September 16,
2021. Whereas the official rate posted on the FMDQ Security Exchange website
opened at N412.64/US$ and closed at N412.06/US$ on the same day. This represents
an opening spread of N152.36 and a closing spread of N149.94, which was too
large for the CBN to ignore.
Therefore, the CBN referred to the online platform-
AbokiFX.com as an illegal FX dealer, endangering the Nigerian economy.
According to the CBN Governor, “The CBN act section 2, does make it clear
that only the Central Bank can determine the value of the naira, and yet a
single individual living in England continues to manipulate the exchange rate
and make a huge profit…” The CBN Governor said they at the apex bank had
in the last two years launched an investigation into the illegal trading and
economic sabotage of AbokiFX and its owner-Mr Olusegun Oniwinde. The apex bank
governor said their investigation revealed that the players on the platform
get naira loans, use them to purchase dollars, take a position, change the
rate over a given period, sell the dollars they purchased and make a profit. The
CBN Governor also alleged that Mr. Oniwinde is an illegal forex trader with over
20 bank accounts in eight banks, filled with money from the speculative
activities which he sell to Nigerian companies, thereby violating the country’s
foreign exchange laws.
The CBN believes AbokiFX posts arbitrary rates without
contacting the BDC operators and uses the platform for forex manipulations and
speculations. The CBN argued that this deliberate manipulation of the rates by
the platform is spreading the gap between the official rate and the parallel
rate which creates room for arbitrage by the platform owners and other players
in the parallel market.
The company, AbokiFX founded in 2014, is a research
and information service company, that conducts research and gathers data on the
parallel market rates.
According to the company, “AbokiFX does not trade
FX, which we have always maintained in our emails and social media platforms.
Neither do we have the power to manipulate the rates, we do not create the
The company maintained that they simply collate and
post data on their website, citing companies using their data for internal and
external audits as well as planning and budgeting. They noted that the rates
are sourced and carefully collated, thereafter reviewed and the mean rates
posted from the data pool. The company recognised that a similar situation had
played out in the Nigerian FX market in
2017 where the naira depreciated to over N500/$1, and they were accused of
manipulating parallel market rates.
Following the decision of the apex bank to halt the
sales of FX to BDC operators, a development which has led to a significant
depreciation of the naira against the dollar, the body of Chief Executive
Officers (CEOs) of banks on…
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