The stability in the forex market following continuous interventions by the Central Bank of Nigeria (CBN), has affected the profits of black market operators and others who raked in millions of dollars as a result of volatility in the market. COLLINS NWEZE examines how key players have adjusted to the new era.
The sight of dollar bills can make even a rich man’s heart beat faster. For those whose stock in trade is the greenback, the anxiety it brings to their business has continued to soar.
The commercial banks, bureau de change operators, currency speculators and black market operators, which remain key players in the foreign exchange (forex) market, have all endured the policy changes and how they affected their operations.
The Central Bank of Nigeria’s (CBN’s) assurance to stakeholders that it will continue to intervene in the forex market, a promise it has kept for more than five months, has stabilised the market.
But stability is bad news for forex traders. They prefer volatility which makes them to declare more profits.
Head Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the forex market has lost its drive for profitability and is no longer exciting for players. He said the boom time for forex dealers was over after the CBN kept its dollar intervention promises.
“In terms of forex business, it is not as exciting as it used to be. What makes the market exciting is volatility. The operators are not always happy when market becomes stable, because their profit margin drops. The profit-taking opportunity in the market is very lean at present and so are the turnover and spread,” he said.
He said Nigeria’s currency crisis was triggered by dip in crude oil prices, which adversely affected Nigeria’s foreign reserves and created chronic dollar shortages. It was the need to curb these dollar shortages and stabilise naira against world currencies that prompted the CBN to regularly inject dollars into the market to narrow the spread between the official and black market rates.
This measure has not only led to convergence between parallel and black market rates, but has chased currency speculators out of the market.
While the banks have continued to get dollar supplies to meet the demand of genuine forex users, the black market operators whose cost of operation has remained the lowest in the value chain, have also stayed put in the business.
“The black market operators do not need licence to operate, neither do they demand for documentation from forex buyers. They are simply doing cash and carry business and have largely benefited from the rate convergence although their profit margin has also dropped,” a Lagos-based BDC operator, Isah Yakubu, said.
He said black market forex has been in operation for over 100 years, adding that patronage for this market has continued at all times, not-withstanding the state of the economy and forex market.
“The black market operators do not demand for Bank Verification Number (BVN), international passport or other travel documents before selling dollars to customers. Both the BDC rate and black market rates have been trading at N362 to dollar for months,” he said.
“The black market forex operators incur little or no cost of operation. They have no staff, and are always on the street. But those that patronise them run the risk of receiving fake currency or defrauded of their money,” he said.
For the currency speculators, who buy dollar for keep, and sell when it strengthens, the forex business has been a nightmare after the CBN sustained its interventions. After recording huge losses in naira and foreign currencies, these speculators seem to have been chased out of the country’s forex market.
Confirming the development, the President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said with rate convergence at both the BDC and parallel markets, and transaction margins narrowed to N2 in most cases, the market seems unattractive to speculative dealers.
The speculators lost over N700 million in March, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over N1 billion in April, after the Investors’ & Exprters’ Forex Window was opened to deepen dollar liquidity in the economy.
Gwadabe said speculators lost billions of naira in the past, with their businesses badly hit when the CBN achieved exchange rate convergence.
According to him, forex demands in the market are now genuine, and over 3,000 BDC operators have continued to make their twice-weekly dollar bids at the CBN to boost liquidity.
“We are happy that the forex demands in the market are becoming genuine. Speculators can no longer survive the current stability in the market and that is good for the economy and the naira,” he said.
Gwadabe defended the operations of BDCs, saying they have contributed significantly to the current exchange rate stability being witnessed in the country. He disclosed that in India, the BDCs generate over $30 billion from the Diaspora remittances. Besides, in the United Arab Emirates, the entire needs of banks are met by the BDCs. The working of the Lebanese economy is highly dependent on the activities of BDCs in that country. He urged the managers of the economy to continue their support for BDC operators.
Many forex speculators panicked as news about the CBN’s intervention hit the market. The intervention was in continuation of the regulators’ strategy to strengthen the value of the naira.
The CBN Corporate Communications Department Acting Director, Isaac Okorafor, said the apex bank had so far met all the legitimate forex demands from genuine customers. He reiterated that the CBN would ensure sustainable forex liquidity and transparency to enable as many customers as possible get access to the foreign exchange they genuinely demand.
He advised eligible individuals with genuine foreign currency needs to freely approach their banks and authorised dealers with their request, stressing that the CBN had made adequate provisions of foreign currency for all such legitimate purposes.
The CBN has also reiterated its stance towards intervening at the Interbank Foreign Exchange market. It warned speculators against “nefarious activities’’, stating that checks were in place to guard against unlawful practices.
The economy has also enjoyed major inflow of forex in recent months with over $11.3 billion recorded in the I&E FX Window. The I&E FX window, also called willing-buyer willing-seller window, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.
Afrinvest West Africa Limited Managing Director Ike Chioke said the jump in foreign inflows was not a surprise given the development in the FX market, particularly the launch of the I&E FX window in April.
“The largest volume of foreign inflows was recorded in May, underlining the positive impact of forex market transparency and flexibility on investor confidence. The knock-on effects of strong portfolio flows are already evident in performance of the domestic equities market which has historically been driven by foreign portfolio investors,” he said.
Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.
“Nigeria’s crude oil – bonny light, which traded at $110.2 per barrel in January 2014, reaching $114.6 per barrel by June last year, is now trading below $50 per barrel.
“With the discovery of the shale oil, crude oil prices are projected to moderate in coming years. In addition, the threat by the United States (U.S.) to reduce oil imports constitutes a downside risk on crude receipts of OPEC members. Consequently, the CBN must establish a “real” and “sustainable” value for the naira as the opportunity cost of “substantial” support for the naira increases,” he explained in a report – Naira Trending Towards 2015.
Chioke said Nigeria’s dependence on crude oil (currently 70 per cent of total foreign exchange earnings) makes economic growth susceptible to oil price shocks. According to him, a decline in crude oil price would lead to a corresponding decline in oil receipts; “which will forestall the accumulation of external reserves, creating a negative signaling effect that leads to capital flight, thus depreciating the naira.”
“The current over reliance on oil receipts – oil receipts account for about 96.8 per cent of the country’s total exports – by the government poses a huge threat to the stability of the economy,” he noted.
Okorafor said the success recorded at the I& E FX Window was an indication of the appreciable level of confidence by foreign investors and autonomous suppliers in the forex management.
He said with improving reserve levels, the bank was determined to continuously make forex available to all genuine customers through their banks, advising those hoarding the greenback to reduce their losses by selling their dollar stock. The foreign exchange reserves which currently stand at $33 billion is expected to cover 8.1 months imports, when imports of services are added.
The FBN Capital, investment and research firm said: “The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 million barrels per day level”.
Continuing, it said: “On the basis of the balance of payments for 2016, reserves at end-August provided 10.8 months’ merchandise import cover. When we add imports of services, the cover is still 8.1 months,” it said.
The report explained that the CBN will also be boosted by the signals from the I&E window, where turnover has continued to soar since it was launched in April 21. The positive performance at the window has also been attributed to CBN’s policies, especially its instruction to banks and other authorised dealers to implement electronic Certificate of Capital Importation (eCCI) for foreign investors.
The Certificate of Capital Importation is given to foreign investors to confirm the level of investment they have brought into the country. The certificate has always been on hard copy until this policy shift.
The eCCI implementation, which takes effect tomorrow, is expected to boost transparency and enhance confidence of foreign investors in the local market. The foreign investors constitute about 70 per cent of the total transaction turnover in the capital market.
The eCCI would enable foreign investors to easily find out the status of their investments in the country, increase transaction efficiency and ensure that investors get adequate returns on their investments.
In a circular to all authorised dealers, CBN Director, Trade and Exchange Department, W. D. Gotring, said: “To enhance transparency and efficient processing of foreign investment flows to the country, the CBN informed all authorised dealers and the public of the deployment of electronic Certificate of Capital Importation (eCCI) platform.”
Speaking also on the development, Ezun, said the volume of capital inflows was likely to rise with the coming of eCCI, which is expected to cut off all processing bureaucracies that discourage investors.
He explained that before now, the CBN had appointed the Financial Market Dealers Association (FMDA) as the sole issuer of certificate of capital importation.
He said the banks buy booklets of Certificate of Capital Importation from FMDA and issue them to foreign investors. The Certificate of Capital Importation, Ezun added, allows the foreign investors to buy dollar at the official rate when they are repatriating their profits or exiting the economy.
“If any bank has a customer that brought dollar into the economy, such bank gets the CCI from FMDA and issues it to the customer. It helps the customer to access dollar from official rate official rate when he is exiting the economy,” Ezun said.
He said the eCCI would take the market to the next level because the transactions were available for everybody to see.
Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
“While Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability,” she said.
The CBN’s decision to adopt the flexible foreign exchange (forex) policy on June 20, 2016 has also come with implications. The flexible forex policy, which removed the 16-month N197 to dollar peg against the dollar, restored the automatic adjustment mechanism of the exchange rate to enhance efficiency, liquidity and transparent forex market. It also allows only one single market structure where rates are expected to be determined by market forces, boost investors’ confidence and attract more dollars into the economy.
Stakeholders proffer solution
Chioke believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy.
To him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves. “To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.
He explained that asides from oil receipts, the development of the agricultural sector will in the short-term reduce the forex burden of food imports and on the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.
Ezun said the solution was not in policy change but in boosting dollar liquidity.
Ezun said: “There is a limit to how far a policy can support naira. Demand for dollar is huge because the economy is import dependent. A lot of industries still depend on importation of raw materials and finished goods making our import bills to go up.”
Gwadabe said the country has not been able to build strong buffers, so that when crisis of this nature occurs, as seen in other countries, the economy would be protected.
He said: “The United Arab Emirates has over $400 billion in their reserves and that is a very big buffer for them as it protects their local currency at any given time and that is what I would want to see in Nigeria. Don’t forget that without the buffers, there is no way one can defend the local currency.”
It is the absence of such buffers at a period of global crude oil crash that has remained the bane of the naira.
Banks’ role in forex market
The commercial banks are also having a good time over current naira-dollar rates. Many forex buyers buy from commercial banks because of favourable rate.
The preference for commercial banks followed the uncompetitive rate regime that shifted the business patronage in favour of the lenders.
The BDCs, Gwadabe said, buy dollar from the CBN at N360/$1 and sell to end users at N362/$1 while the regulator sells to commercial banks at N358/$1 and the banks sell to end users at N360/$1.
Gwadabe described the buying rate for the BDCs as “uncompetitive” and “a big disincentive for many forex users to patronise the operators. He said the banks and the BDCs service the same market segment, they should get dollars at the same rate to enable both institutions compete favourably.
According to the ABCON boss, the banks enjoy a large customer base with the customers having their accounts debited to cover the cost of purchase. Such convenience plus a lower rate put the banks at an advantage position to attract more customers than BDCs, he said.
He lamented that BDCs are not only buying at exorbitant rate, but also sell at a rate higher than that of the banks, hence creating low patronage for the operators.
Gwadabe advised the CBN to review the rate at which the dollar is sold to the BDCs to boost the recovery of the naira against dollar. He said the success recorded by the CBN in stabilising the naira was largely contributed by the BDCs, which remain backbone of the retail forex segment of the economy.
“The CBN should be proactive enough to quickly review the BDC buying rate to ensure effective competition among all the stakeholders. There is no need to give the banks undue advantage over the BDCs as is currently the case based on the level of disparity seen in the dollar buying rate by both sectors. Nothing stops the CBN from ensuring that both the banks and BDCs buy dollars at same rate,” he stressed.
Gwadabe said the rate challenge faced by BDCs, if not checked, would trigger a liquidity crisis that may derail the ongoing recovery of the naira against the dollar. He said the BDCs will continue to support CBN’s determination to stabilise the exchange rate, and strengthen the value of the local currency.
Gwadabe also called on the CBN to increase the volume of Personal Travel Allowances (PTAs) from $4,000 to $8,000; Business Travel Allowances (BTAs) from $5,000 to $10,000; school fees from $5,000 to $20,000 and medicals from $5,000 to $15,000 quarterly to deepen liquidity in the market.
Gwadabe praised the CBN for liberalising the forex market and making more dollars available, adding that making the funds readily available in right volumes will double the positive impact of the policies on the economy.
