Currency traders blamed the Central Bank of Nigeria’s (CBN) inconsistent dollar distribution to Bureau De Change (BDC) operators for the naira’s ongoing decline and the instability of the foreign currency market.
Although the BDC owners acknowledged the beneficial effects of the CBN’s dollar sales, they pointed out that if the exercise is not repeated or sustained, clients will lose faith in the currency market, which will put pressure on the parallel market.
They have pushed for at least once or twice a week CBN intervention in the retail sector of the market.
On July 18, 2024, the CBN authorized the selling of $20,000 to Bureau De Change (BDC) operators at a cost of N1450/dollar to strengthen the naira and alleviate the shortage of foreign exchange, particularly for retail customers.
The forex distribution to BDC businesses occurred during a period of intense demand pressure, with the exchange rate surpassing N1600/$1.
The CBN stated that it has seen ongoing anomalies in the retail end of the market, which are feeding into the parallel market and increasing the exchange rate premium when it approved the sales of dollars to BDCs.
It is anticipated that this step will satisfy the need for invisible transactions, stop the growing exchange rate premium seen in the parallel market, and guarantee a more stable exchange rate.
CBN intercession
Following a protracted suspension by the top bank in 2021 because of accusations of illicit forex trading by these currency dealers, this is the CBN’s sixth effort to sell forex to the BDC operators.
However, the prohibition was removed early this year as a result of the revocation of over 4173 BDCs’ licenses in February.
The CBN sold $20,000 to each BDC at a rate of N1,301/dollar during the first try in February 2023. In the second attempt, the apex bank reduced the allocation by 50% and sold forex at a rate of N1,251/dollar.
The selling of dollars to CBN-licensed currency dealers is one of the apex bank’s intervention strategies designed to increase liquidity and stabilize the foreign exchange market.
Other examples include the resumption of the Retail Dutch Auction System, in which the central bank sold $876.26 million to end users via the banks, and the recurring sales of dollars to authorized currency traders.
The Association of Bureau De Change Operators in Nigeria (ABCON), which had pushed for involvement in the foreign exchange market to help improve liquidity, particularly in the retail end of the market, seems to have put pressure on the CBN with the periodic sales of dollars to the BDC operators.
They insisted that the various exchange rate policies would not be effective without them and claimed that the devaluation of the naira was the result of their exclusion from the foreign exchange market and the shortage of forex supplies.
The dollar is currently trading at N1590 on the parallel market, indicating that the exchange rate is still high and unstable despite the CBN’s intervention in the currency market.
The BDC operators expressed dissatisfaction with the CBN’s dollar sales frequency, implying that it is insufficient to maintain the intended effect.
What to note
After a protracted break, the CBN had earlier in the year started selling currency to BDC operators again.
Subsequently, in February 2024, over 4,173 BDCs had their operational licenses revoked due to non-compliance with certain regulatory criteria.
In February 2024, the CBN made its first dollar transactions, selling $20,000 to each BDC at a rate of N1,301/$. A second attempt was made after that, in which the CBN sold $10,000 to BDCs at a rate of N1,251/$1.
It is anticipated that the CBN’s deliberate involvement, particularly in the retail segment of the currency market, will increase liquidity and improve market efficiency.
