CBN Policy: Will The Rates Drop?

On the 9th of August 2016, the Central Bank of Nigeria (CBN) released a policy regarding Bureau de Change (BDC) operators. This policy allowed banks to sell cash dollars to BDCs subject to a weekly limit of Thirty Thousand Dollars (USD30,000) but later revised to a weekly limit of Fifty Thousand Dollars (USD50,000).

Banks (authorized dealers) are allowed to sell the funds they got from international money transfers operators to BDCs with a margin of 1.5% margin while BDCs are allowed to sell at a margin not exceeding 2% of the rate purchased from the Authorized Dealers.

Subsequent to the sale, BDCs are expected to render weekly report of their sales, thus, KYC of customers are to be recorded as well as an endorsement of funds paid out in the international passport of the customer. Also, the sale of purchased funds by BDCs can only be utilized for:

  • Business
  • Travel
  • Allowances/Personal
  • Travel Allowances
  • Overseas medical fees
  • Overseas school fees

The previous scenario involved the CBN dispensing weekly funds to BDCs. When this stopped, BDCs had to source funds from autonomous sources. The current scenario involves International Money Transfer Operators dispensing funds to banks, who in turn sell to BDCs and then remit whatever excess there is to CBN. This has placed the CBN at a vantage point: access to funds and tracking of the FX flow in the market.

This new policy by CBN begs the question; will there be a reduction in rates? Market watchers are of the opinion that rates will track downwards on the back of the supply of these funds at the official rate. Some think this initiative is too late and too small to cause any significant rate reduction in the parallel market. However, certain scenarios are plausible:

There will be increased pressure on the Naira in the parallel market, as the market, through the BDCs, will be supplied approximately USD42m weekly at the official rates, we expect the rates to drop or at least hold steady within the N390-N397 band.

The effective tracking of international remittance and the ultimate remittance of the unused balance to the CBN will increase CBN’s firepower with respect to providing liquidity to the parallel market or the official market as and when required to stabilize the market.

The market is currently at a breakeven point. It has traded for a while at a resistant level of N400 per dollar and we are of the opinion that if it breaks this resistant point, the resultant panic might push the rate to a N420-N450 bracket. This is a possibility if the Niger Delta agitation and low price of crude oil in the international market continue.

In conclusion, the policy brings about systemic and effective tracking of proceeds from international money transfer operators, deposit money banks and players in the industry. In the race to stabilize the Naira, corridors for money flow are as important as volume especially when they are sold at the official rate. With effective tracking, the CBN is more aware of money flows and in a better position to influence rates by supply activities.

We are certain that BDCs are critical partners of the CBN in its quest to stabilize the Naira but we also understand the difficulty in managing over three thousand BDCs to ensure requisite compliance. We therefore recommend a supervision-based classification of BDCs where their retail reach, capacity and reporting compliance forms the basis for allocating higher cash sales to the qualifying BDCs.

This article was originally published by VFD Group

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