Introduction
Nigeria has in recent times, struggled with sustaining the liquidity in the foreign exchange market and stabilizing the value of the Naira. The Central Bank of Nigeria (CBN), the apex regulator of financial institutions and financial activities, has continued to put measures in place to ensure the availability of foreign currency to consumers.
On 27th July, 2021, the CBN announced at the Monetary Policy Committee, the cessation of weekly allocations and sale of foreign currency to Bureau Du Change (BDC) Operators in Nigeria. Today's article will consider the rationale for the cessation as well as the effects on the Nigerian economy.
BDCs and their Primary obligations
BDCs are essentially non- bank corporate entities licensed by the CBN to carry out foreign exchange business on a small scale. They are primarily licensed to service the foreign exchange requests of customers who require foreign currency for purposes such as Business Travel Allowance (BTA), Personal Travel Allowance (PTA), school fees, medical bills, utility bills and life insurance premium and such other transactions which the CBN may from time to time permit.
Rationale for the CBN's Decision
The decision of the apex bank to halt the sale of foreign currency to BDCs is based on the premise that BDCs have been conducting foreign exchange transactions which are contrary to their mandate. In addition, BDCs have been accused of being used as conduits for money laundering activities.
It is important to note that the CBN's Revised Operational Guidelines for Bureau Du Change in Nigeria, 2015 (Guidelines) and other directives of the CBN stipulate that the maximum amount to be allocated to a customer for a foreign exchange request for BTA or PTA is $5,000 and $4000 respectively. The CBN Foreign Exchange Manual, 2018 also stipulates that BDCs are only permitted to sell foreign exchange to customers who require the foreign currency for BTA, PTA and payment of foreign bills highlighted above. In addition, one of the conditions of sale is that the foreign currency is to be sold to customers at the CBN's specified profit margin. In reality, however, these rules have not been complied with for many years and sourcing foreign exchange from BDCs has been equivalent to purchasing from the parallel market. In addition, BDCs have continued to deal in foreign exchange transactions with members of the general public, whether or not they meet the required criteria.
To ensure continued liquidity in the foreign exchange market, the CBN has announced that the weekly allocations of the BDCs will be diverted to Authorised Dealers (commercial banks) who are now required to meet the legitimate demands of customers. According to the CBN's directive to commercial banks, all banks are required to set up teller points at designated branches across the country to fulfil legitimate foreign exchange requests for PTA, BTA, payment of tuition fees, medical payments, amongst others.
Effect of the CBN's Announcement
The implication of the CBN's announcement is that whilst existing BDCs have not been barred from dealing in foreign exchange transactions, they are no longer able to purchase foreign exchange from the apex bank. Therefore, their only source of foreign exchange would be from the parallel market.
In effect, the cessation of the sale of foreign currency by the CBN to BDCs will likely create scarcity and result in a spike in the foreign exchange rate in the parallel market. Although the CBN's reallocation of funds to the commercial banks is intended to curb scarcity, it is unlikely that the commercial banks will be able to fulfil all customers' obligations in due time.
In addition, BDCs have been a major source of foreign currency to businesses which are not eligible to obtain foreign currency from the official Nigerian Foreign Exchange Market for the purpose of fulfilling their foreign obligations. By virtue of the CBN's Foreign Exchange Manual, 2018 directing such businesses to obtain foreign exchange from autonomous sources, these businesses have relied on BDCs to provide foreign exchange without breaching anti- money laundering laws. The CBN has, however, by its decision shut another window for businesses to obtain foreign currency.
Conclusion
Although, the decision of the CBN is commendable to the extent that BDC operations beyond their original mandate will now be curbed, it is important to note that this decision may also strain the foreign exchange market, thereby creating further hardship for legitimate businesses with foreign exchange obligations.
It is therefore recommended that rather than cease supply to BDCs, perhaps a more effective solution would be enforcement of applicable CBN regulations which have not been complied with.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
