Financial experts divided on CBN’s dollar sales to BDC operators

Financial experts are divided over the Central Bank of Nigeria.(CBN)’s decision to sell dollars  to Bureau De Change (BDC) operators below the market rate, with some questioning its transparency and others saying it would  enhance liquidity in the FX market.

The recent dollar sales to BDCs below market rate at N1,101/$1 was the third attempt after a long period of suspension by the Central Bank of Nigeria (CBN) in 2021.

In an exclusive interview with Nairametrics, the experts expressed mixed feelings about the ability the sustain the initiative.

Some analysts criticized the Central Bank of Nigeria’s (CBN) handling of the Naira floating policy, citing a failure to establish a transparent and efficient single foreign exchange market.

They noted that CBN’s selective sales of hard currency to banks and Bureau de Change operators is devoid of transparency and sustainability, stressing the importance of market mechanisms for efficient resource allocation.

However, there are others who support CBN’s sale of foreign exchange to Bureau de Change operators. While acknowledging short-term benefits, they advise the CBN to focus to bolster foreign exchange earnings to safeguard reserves.

According to them, the initiative’s sustainability hinges on enhanced oversight and increased FX reserves.

Recommended reading: CBN sells dollars to BDCs below market rate at N1,101/$1

CBN’s recent dollar sales to BDCs

Nairametrics reported recently that the Central Bank of Nigeria (CBN) issued a circular to Bureau De Change operators (BDCs), informing them of the sale of $10,000 to each BDC at a rate of N1,101/$1.

According to the circular, each BDC is instructed to sell the dollars to eligible customers at a rate not exceeding 1.5% above the purchase price.

This suggests that BDCs are not expected to sell above N1,117/$1. The selling rate is below the N1,251.05/$1 recorded at the end of last week, according to data from the Nigerian Autonomous Foreign Exchange Market (NAFEM).

This is the third attempt by the CBN to sell FX to BDCs after a prolonged period of suspension by the central bank in 2021. The ban was lifted earlier in the year following the revocation of licenses of over 4173 BDC operators in February.

What market experts are saying

David Adonri, Managing Director of Highcap Securities Limited, in an exclusive interview with Nairametrics, raised concerns over the CBN’s handling of the Naira floating policy, stating that it has failed to establish a transparent and efficient single foreign exchange market.

Adonri emphasized the necessity of creating a market structure that allows all economic entities to participate in buying and selling foreign exchange through authorized market operators.

He argued that such a structure would effectively allocate hard currencies to various competing needs and produce a single market clearance rate that accurately reflects the true value of the Naira.

Highlighting the current shortcomings, Adonri pointed out that the CBN’s approach involves selective sales of hard currency to banks and Bureau de Change (BDC) operators, which lacks transparency and is susceptible to illicit transactions.

He criticized this strategy as flawed and unsustainable in stabilizing the Naira.

  • “The selective sale of hard currency to banks and BDCs by CBN is non-transparent and prone to shady deals. It is a flawed strategy that cannot sustainably stabilize the Naira. 
  • It is inimical to the policy objective of letting market mechanism allocate scarce economic resources in the economy in order to achieve efficiency,” he said.

Victor Chiazor, Analyst and Head of Research at FSL Securities Limited, also in an exclusive chat with Nairametrics, expressed support for the CBN’s decision to continue selling foreign exchange (FX) to Bureau de Change (BDC) operators. He believes this move is aimed at enhancing dollar liquidity within the system and strengthening the Naira against the dollar.

Highlighting recent actions by the CBN,  Chiazor noted that the central bank has been consistently selling dollars to BDCs at reduced rates, with the last sale reportedly occurring at approximately N1,101/$1 per dollar.

He suggested that this strategy is intended to signal to the market that the Naira is undervalued and that the CBN is committed to meeting the demand for dollars for approved invisible transactions.

  • “However, the CBN will have to improve on its foreign exchange earnings to prevent weakening its foreign reserves,” he said. 

Experts defend CBN

Tajudeen Olayinka, an Investment Banker and Stockbroker, said that the CBN is employing a multilevel strategy aimed at safeguarding the Naira’s stability.

According to Olayinka, the CBN’s approach includes inducements such as interest rate adjustments to attract foreign portfolio investors, offering government securities at sizable amounts to maintain high interest rates, and providing direct dollar allocations to BDC operators to curb or minimize irregular behavior within the market.

He emphasized the complexity of the CBN’s strategy and expressed confidence that the central bank has implemented appropriate mechanisms to ensure its sustainability.

However, Olayinka warned that failure to maintain these mechanisms could lead to disastrous consequences.

Olayinka noted that the sustainability of the CBN’s strategy hinges on its ability to exert pressure on the government to enhance both crude oil production and non-oil exports.

He believes that once these factors are optimized, speculative attacks on the Naira will significantly diminish.

On his part, Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), commended the Central Bank of Nigeria’s (CBN) decision to provide liquidity to the retail end of the foreign exchange (FX) market.

According to him, this move is beneficial as it addresses the need for liquidity while reducing market distortions.

Amolegbe said the initiative is sustainable because the CBN has implemented measures to sanitize the retail FX platform and closely monitors the activities of market participants.

He highlighted that this approach gives the CBN visibility into actual demand, which helps to dispel misconceptions about the volume of FX being disbursed.

Amolegbe also pointed out that the current increase in Nigeria’s FX reserves strengthens the CBN’s position, providing a more war chest compared to previous periods.

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