The Central Bank of Nigeria has stopped selling dollars to exchange bureaus, saying that they are being used to transmit illicit funds. As a result of the 2016 oil crash, Nigeria had multiple exchange rates operating simultaneously since that was the only way to prevent a substantial official devaluation of the naira
According to a recent Reuters report, BDCs are believed to be supplying the scarce resource to so-called ‘illegal’ dealers instead of providing forex to retail users. The naira crashed by about five percent as the weakening of the BDC operations weighed heavily on the market; the NGN/USD rate fell to around 525, while before, it was stable at about 505.
Parallel market exchange rates are charged by illegal dealers who offer foreign exchange to clients. However, the parallel market dealers use a rate of N500 for every dollar instead of the CBN’s fixed rate, which is N411 for every dollar.
CBN Governor Godwin Emefiele was quoted as saying that operators were profiting at the expense of suffering Nigerians while the CBN acted to end forex sales to BDCs. It is for this reason that the CBN has intervened. At the same time, BDC’s operations continued to deteriorate, which raised concerns about the currency’s near-term prospects. Earlier, the naira traded at about N510/$ in Lagos but fell to around N525/$. In Abuja, the currency traded at N530/$, inching towards N550/$. Before the new decision, the naira was stable at about N503/$.
According to another report, the CBN had been supplying each licensed BDC $10,000 per week at the rate of N393 with the instruction that they should sell with a margin of N2, but some of them sell as high as N505, making over N100 on every dollar sold.
Nigeria has several exchange rates operating in parallel, a system put in place during a 2016 oil price crash because the government was seeking to avoid a sizable official devaluation of the naira as a matter of national pride. For the time being, inflation has tempered somewhat after hitting multi-year highs this year, mainly due to the impact of the Covid-19 pandemic and falling oil prices, but foreign currency reserves remain under pressure.
The central bank has devalued the naira’s official rate three times since the pandemic took hold early last year and has limited dollar access for imports. Still, a wide gap between the official naira exchange rate and the parallel market has persisted.
CBN Governor Emefiele told reporters that the central bank would direct foreign exchange to commercial banks for those with ‘legitimate needs,’ adding, “We will deal ruthlessly with the Nigerian banks who have collaborated with these illegal foreign exchange operators.” Meanwhile, Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, explained that the addition of more foreign exchange via other channels was helpful; it wasn’t going to solve the bank’s problems long-term. According to Khan, “The challenge in the interim will be to stop the emergence of a new parallel market. Unless the supply of FX improves meaningfully, this is likely to remain a risk.”
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