CBN ruins Black Market business, says Gwadabe

Posted By Uchenna Ajah On Monday, April 23rd, 2018 With 0 Comments

Central Bank of Nigeria (CBN’s) foreign exchange management policies have begun to put severe pressure on Nigeria’s parallel foreign currency market as ‘Black marketers’ begin to see their trading margins disappear. Indeed with more stable supply of forex and growing investor confidence on rising oil prices (currently at $74 per barrel) , the business of currency speculation has become more precarious and former black market lords have begun to feel the pains. In an exclusive interview with Business Hallmark’s FELIX OLOYEDE, the Chairman of the Association of Bureau d’ Change of Nigeria (ABCON), Alhaji Aminu Gwadabe, gives insights into how CBN’s foreign exchange management is affecting currency trading generally and what the impact has been on the road economy.  

What is happening at the BDC section of the FX market?

The situation at the BDC subsector is worrisome. There are a lot of concerns in terms of our operations. The rate that is applicable to the BDC subsector is discouraging. We thank God that there is convergence in the market. The parallel market rate is even lower than the BDC exchange rate. This is good for the economy. But then, it is very difficult for our members to operate within that narrow. What I mean is if you look at our buying rate of the proceeds of the International Money Transfer Operators, where we access forex, because we are no long getting FX from the CBN. We get FX from international remittances that come into the country through money transfer operators like Western Union, MoneyGram etc. There is about 11 of them that inflow these dollars into the economy. Presently, we buy dollar from that window at N360 and the banks are buying at N357. Parallel market operators are buying at N359 and sell at N361. We buy at N360 and pay COT of almost N1. We rent offices and pay overhead cost and also render returns as an obligation. When you add all these expenses, our cost implication is about N361.50. And we are expected to sell at N362. It is like we are in the process of being eliminated from business. It is high time, relevant authorities looked into this situation, because it has become very difficult for us to operate. The numbers of BDCs that are accessing this window is dropping. 50 per cent of our members are not in that window again. This has created serious concern. This is the plight that BDCs are facing right now.

The external reserves have reached five year high. How has this impacted the market?

If there is a stimulus that has impacted the market, it is the foreign reserves. Everybody knows that is the backbone and oxygen of the economy. It gives confidence to foreign investors who want to come in that this reserve is strong, so, I can take my investment into that economy. And whenever I want to exit, they have enough reserves to enable me take back my investment.  Secondly, it has addressed the problem of speculation. Why would you speculate when the CBN is having huge reserves to meet whatever demand that is coming from the market? It has eliminated speculation. It has provided enough liquidity for the CBN to create a lot of windows- the SME window, Investors’ and Exporters’ FX window. There are so many windows opened by the CBN to critical needs of the market and this was a result of the growing foreign reserves. Oil price is still going up and production output is still stable that is really the Central Bank of Nigeria a lot of stimulus to ensure that there is stability in the foreign exchange market. It has helped a lot in providing liquidity and stability in the FX market.

How has remittance been in the last one year, since the I&E FX window was introduced?

Unfortunately, over 60 percent of diaspora remittances come in through unofficial channels. The CBN only captures about a sixth of the total remittances that come in. There are different statistics. One statistics says it is about $21 billion that comes into the economy. IMF statistics states $27 billion. There was a time HonourableAbikeDabiri-Erewa, special assistant to the President on Diaspora said it was over $30 billion. Even if we take the lower limit, which is $21 billion, what is captured is one-sixth. Most remittances come through hand to hand delivery and other means not captured by the CBN. Inflow has improved, but there is still room for these inflows to come into this country to ensure that BDCs are afloat and the BDCS are being used to help the regulator to ensure there is liquidity and price stability. Bureau de changes have remained the only potent tool that the CBN can use to ensure price stability. They have used other means before. We used to have the Retail Dutch Auction System, Wholesale Dutch Auction System, excess allocation, licensing, single exchange rate market, all these were different measures employed by the CBN, but there is no one that has been more effective than the collaboration with the bureau de change operators.

There are still multiple exchange rates in the Nigerian foreign exchange market, which gives room for arbitrage. What do you think the CBN could do to have a single exchange rate?

The CBN has been in a static position for a long time. What I mean by static position is that for instance, the inflation rate is now lower than the MPR, which is an opportunity that the CBN can explore. The MPR is 14 per cent and inflation is at 13 per cent. Before now, the CBN was concerned. It does not want to cut interest rate because inflation rate was higher than MPR. Secondly, the foreign reserves have improved significantly. Thirdly, there is a lot of tension in the economy. People are crying about security, stomach infrastructure etc. The multiplicity of exchange rate discourages price discovery. And one of the mandates of IMF is that CBN must achieve price discovery in the market. So, if we continue to have N360, N362, N305 as exchange rates, I don’t think it is transparent. The issue of transparency will still come up. This is the right time for the CBN to ensure transparency and price discovery in the foreign exchange market. For instance, the parallel market price is even lower than any other exchange rate in the economy. Before now, it was the parallel market price that everybody was using to determine prices in the economy. This is a good achievement by the CBN. This is the time they need to sit down and bring the rate down to ensure that there is a merger of the BDC and bank rates. There is no point having banks buy dollars at N357 and BDCs buying at N360. These two rates as a matter of urgency should be collapsed immediately. So that we can have only at most three rates, instead of having four, five or six rates. This is my own advice.

What has happened to the currency swap agreement the country signed with China?

Unfortunately, that is dead. For some time I have not heard anything about it. It would have been an option for having naira stability. We have no option than to make Naira sovereign. The strength of every country lies in the sovereignty of its currency. Take America for instance, it is not by arms or military strength that it is a superpower. It is because the dollar is powerful. Anywhere you go all over the world, you can use the dollar. That is what makes America strong. It is the British Pound that makes Britain strong and stable. It is the strength of your currency that   determines your sovereignty. It is good we go for the currency swap with China for the good of our economy.

How far do you think political activities would impact the naira as we head towards the general elections?

As we approach the 2019 general elections, that concern is real, whether we like it or not. Nigeria is an economy where one of our major problems is corruption. Nowadays, they do not pay people in naira. They give people money in dollars. The economy is really dollarized. There is a lot of dollars in circulation. People find it easy to give it as a means of gratification. History has shown that there must be exchange of something to get people’s vote, for politicians to win support. That is a big threat. We have to look at it so that it does not hurt what we have achieved in the economy so far.

Just see what is happening in Kaduna. A few days ago there was crisis in Abuja. This discourages foreign investors. I remember, before the 2015 general election, over $100 billion was removed from this economy. A lot of investors were skeptical of the likely outcome of that election. We should not allow it to repeat itself. I believe if we are not careful, there will be dire consequences, because fear of the political unknown is a real threat.

The I&E FX Window will be a year old on April 24. How would you access the performance of thes window in the last one year?

I want to first congratulate the CBN Governor for adopting the strategy to open an I&E FX Window. We were part of those who recommended it. We always have meetings with investors. They often say “How can we come in when your parallel market is doing N360 (that was before the introduction of the I& E Window) and you want us to come in at N305? We cannot come at N305. We then suggested that since BDCs need these dollars to continue operations. And there is a market to sell it at N361. So, we said why not open a window for investors to come at N360 for the BDCs to obtain it and make a margin of N1 or N2 and sell into the market. There would be liquidity. That is where the story started. Today, we can all see it. It is a success. We have tremendous improvement in foreign investors’ interest and their confidence has been renewed. There has been a turnover of over $30 billion in that section of the market in the last one year. It is a huge achievement.

How autonomous has the I&E FX market been?

It has been very autonomous. Nigeria is an emerging market. Investors are following where they are going to make profits. It is more profitable to invest in Nigeria than to invest in America. A five star hotel may cost $150 in America, but it will cost almost a $1,000 in Nigeria. Investors are coming into this country every day and night. We need to only look into our ease of doing business, so that we will continue to attract these investors. The potentials are there.

Why is the parallel market rate lower than BDC rate?

It is because there is a lot of liquidity in the market and there is no demand. The previous demand was the dominate factor that caused spike in exchange rate. This has been checked. The success we have recorded is not limited to only the CBN or bureau de change operators. The security surveillance at our borders also contributed significantly to this success. Before, we had a situation where about $200 million were airlifted illegally on daily basis from this country to other destinations like Dubai and China. Today, that is history.  Frivolous demands have been the major problem of the economy. This has been checkmated. People wanted to hoard dollars before just to make profit. They believed there is a potential for a major spike. Today there is no spike fear. If you are hoarding dollars today, you may lose money. Illegal exploitation of dollar, hoarding and smuggling has been removed.

Is it not time for the CBN to unban the 41 items that were restricted from accessing FX from the official market?

I will be talking from the point of view of a nationalist. The banning of those 41 items would encourage our local content, so as to create employment for our people. We cannot continue to create employment for other people’s economies while our economy suffers. There is no economy that grows without becoming stringent in its trade policy. China had to create a wall to stop people from other countries from coming in to hurt its domestic market. Thousands of items are coming into this economy. I want to advise the CBN to go after more items so that we can protect our foreign reserves.