Naira Falls to 905/$ on Renewed Pressure at Parallel Market

Naira resumed its fall on Thursday, exchanging at N905 to a dollar at the parallel segment of Nigeria’s foreign exchange (FX) market.

This newest dip by the local currency against the greenback comes amid demand pressure against supply, despite the announcement of operational mechanism for Bureau De Change (BDC) Operations in Nigeria by the Central Bank of Nigeria (CBN).

Parallel market FX dealers were on Thursday, August 24 buying dollar at N895 while selling at N905, according to data by AbokiFX, an online platform that tracks the exchange rate on the parallel market. Before now, the naira had at the parallel market remained flat at N900/$ while at the I&E window it dipped to N773.42/$.

“In the bonds space, investors remain bearish notably at the mid-long ends of the market, due to rising uncertainties over the country’s precarious FX situation as well as the recent pause in fiscal reform direction,” said Lagos-based Vetiva analysts in their August 21 fixed income report. “It appears that the temporary reprieve the naira saw following the announcement of the $3billion Afreximbank loan, is starting to dissipate,” they added.

The CBN recently said among others that the spread on buying and selling by BDC Operators shall be within an allowable limit of -2.5percent to +2.5 percent of the Nigerian foreign exchange market window weighted average rate of the previous day.

“In my view, there is need for a major policy shift on the activities of the BDC beyond just mandating them to buy and sell within the -2.5percent and +2.5percent price margin.

“First, in the past 6-8years, there was frivolous issuance of BDC licenses, and I believe the CBN must rise up to the occasion to clean up what I consider to be a probable error on its part,” an informed market analysts told BusinessDay.

“I have not seen anywhere in the world, where BDCs or Money Services Businesses are as many as we have in Nigeria. It was like a racketing of subsidy, especially, as the CBN was selling FX to the operators at artificially subdued official rate while the BDCs were selling to the market at ‘unholy’ spreads, well outside of the guidance of the CBN,” he added.

Speaking further, our source said, “the CBN cannot monitor the activities of the BDCs we have today, given the number of operators. If we must maintain this volume of BDCs, which I think is unnecessary in a liberalised FX market, and with the level of banking branch penetration we have today.

“BDCs were very relevant when we had less bank branches and relatively weak payment systems. It’s interesting today that most of the BDC operators are clustered around bank branches, so it means that banks can effectively serve that role.

“More so, if we must have as much BDC operators, why not make them agents of banks, as I believe that may help the CBN to better coordinate their activities. In addition, there should be restriction on BDC operation of cash services to ensure effective KYCs and reporting”.

In addition to CBN guideline for spread on buying and selling by BDC Operators, the apex bank also asked for mandatory rendition of BDC Operators statutory period reports on the Financial Institution Foreign Rendition System (FIFX) which it said has been upgraded to meet individual operator’s requirements. The CBN also said that BDCs non-rendition of returns would attract sanction which may include withdrawal of operating license.

“Whoever buys from BDCs or sells to them should get electronic credit/debit and if such person needs cash, they can access the FX cash at the bank, where proper reporting and KYC can be done.

“Again, this new circular has not indicated expected source of supplies to BDCs and I can only hope that CBN is not planning to reinitiate direct sales of FX to the BDCs, as that may possibly just set back the progress.

“Rather, I would expect the CBN to integrate BDCs into the formal window, by allowing them to bid for FX at the official market through their banks, with hope they would sell whatever they buy from the market within 48hours or resell it back to the official market.

“I believe this should be considered, in addition to organising the BDCs for a more effective coordination and better role in the financial system. This would help monitor their activities and weed out speculators and those with rent seeking interest,” the informed financial market analysts further noted.

Earlier this week, Lagos-based United Capital analysts said they expect continued pressure on the Naira across all market segments, “given that FX pressures will persist as Dollar earnings remain weak. However, we expect to see the appreciation of the Naira continue as the CBN continues to implement its recent FX policies”. -BusinessDay

August 24, 2023