Experts: policy may be counter-productive - THE NATION
• Yusuf, Unegbu, Obire, Melaye, others anlyse CBN policy
Not many people saw Tuesday’s decision by the Central Bank of Nigeria (CBN) banning dollar sales to bureaux de change (BDCs) with immediate effect coming.
But what will not be lost to market watchers and dealers is the over $4 billion annual savings to the economy. The CBN had accused the BDCs of violating regulatory guidelines and money laundering. Still, the ban’s consequences on the naira stability, dollar supply to manufacturers as well as foreign reserves position are also being watched closely.
Reacting to the CBN policy, the former Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said what is happening in the foreign exchange market is a consequence of the CBN’s policy choice of a fixed exchange rate regime and administrative allocation of forex.
“It is a policy regime that has created a huge enterprise around foreign exchange – round-tripping, speculation, over-invoicing, capital flight,” he said.
He thinks the action of the apex bank amounts to tackling the symptoms rather than dealing with the causative factors, which is not a sustainable solution.
Yusuf said: “It is regrettable that the CBN does not believe in the market mechanism. Yet market systems are time tested as instruments of efficient resource allocation in leading economies around the world.
“Suppressing the market is like swimming against the tide. It is a difficult battle to win.”
He was of the view that “moving retail forex transactions from BDCs to the banks is like kicking the can down the road”.
“The same issues would manifest even with the banks. Managing a subsidy regime is typically a herculean task. We have seen this happen with fertiliser subsidy and petrol subsidy. The story cannot be different with foreign exchange,” he said.
The former LCCI chief believes the way out of this foreign exchange conundrum is for the CBN to allow the market to function.
“It is also imperative for the apex bank to de-emphasize demand management and focus on strategies to stimulate forex inflows.
“A fixed exchange rate regime is a major disincentive to inflows and creates enormous pressure of demand for forex. It is a contradiction in terms.
“The CBN needs to give the market a chance. Its current approach would continue to deepen distortions in the economy, perpetuate round-tripping, fuel speculation, suppress forex supply and boost underground economy,” Yusuf said.
Former Executive Director, Keystone Bank Limited, Richard Obire, said many BDCs relying solely on the $20,000 weekly dollar allocations from the CBN will have to look for other autonomous sources to stay in business.
He said smaller BDC players will likely quit the market when other sources of dollar inflows dry up.
Obire said autonomous sources would also want to sell dollars to the highest bidders, hence DBCs will attract more dollars from such sources. He said stopping dollar sales to BDCs will be interpreted to mean that CBN is not willing to defend the naira.
He said dollar scarcity has remained a major problem for the market, and the stoppage of dollar sales means more dollars will be saved to attend to other needs.
According to Obire, the spike that is likely to follow the policy shift will push the CBN to further devalue the naira.
“The foreign direct investment has been dropping and the CBN needs to take major steps to save dollar for the economy. But such action will also lead to increased demand for dollars at the parallel market,” he said.
Head, Inter-Governmental Action Group Against Money Laundering in West Africa (GIABA) Office, Nigeria, Timothy Melaye, said some of the BDCs were fined for non-rendition of returns and funding terrorism.
He foresees that dollar scarcity will ballon the exchange rate, adding that BDCs will face hard times while relying on other sources to obtain dollars.
Melaye said dollar scarcity will lead to depreciation of the naira, higher production costs for manufacturers and an uptick in inflation.
“When prices of commodities go up, that will have a negative implication for inflation and reduced purchasing power for the people.
“For funding terrorism allegations against some BDCs, I think the CBN is taking precautions.
“The apex bank is looking at cost and risks of continued sale of dollars to BDCs and where that leads is where non-compliant operators fund terrorism,” he said.
An economist and former President/Chairman of Council, Chartered Institute of Bankers of Nigeria (CIBN), Ikechukwu Unegbu, said the CBN should be more proactive in managing the forex market and safeguarding the external reserves.
He said banning dollar sales to BDCs is a short-term solution that will lead to volatility in the forex market.
According to him, the naira is battered and abused. “If you go to the United States, US$1 is not enough to pay for breakfast, but in Nigeria, N504, which is equivalent to US$1 can fetch you a breakfast. That means the naira is not badly abused,” he said.
Unegbu believes the CBN will reverse the ban on dollar sales and licensing of BDCs.
“There is no doubt the CBN will resume dollar sales to BDCs because the market needs them.
“Some manufacturers cannot get dollars fro banks within the short time they need it. Such importers normally rely on BDCs and will continue to rely on them despite the ban because purchases from banks require heavy documentations, not usually required by BDCs,” he said.
He said the CBN was only trying to enforce discipline in the forex market and ensure the BDCs play by the rules.
He said round-tripping in banks come with heavy sanctions, that include losing forex trading license.
He said just like BDCs, some banks have also been found to violate forex rules and were punished, making them be very careful in their forex dealings.
Unegbu said the CBN should have isolated the bad eggs within the BDC segment for appropriate sanction instead of the blanket ban on over 5,300 BDC operators.
He said that the Association of Bureaux De Change Operators of Nigeria (ABCON) will protest the ban in the coming days.
“They cannot just keep quiet. I advise them to do home keeping and ensure compliance before approaching the CBN to reverse the policy,” he said.