Currency traders cite inconsistent dollar allocation for naira weakening

Currency traders have linked the ongoing depreciation of the naira and fluctuations in the forex market to inconsistent dollar allocations to Bureau De Change (BDC) operators by the Central Bank of Nigeria (CBN).

BDCs have acknowledged the positive effects of the CBN’s dollar sales but pointed out that irregularities in these allocations undermine market confidence and contribute to pressures on the parallel market. Traders have called for the CBN to intervene at the retail level at least once or twice a week to stabilize the market.

On July 18, 2024, the CBN approved the sale of $20,000 to BDC operators at a rate of N1450 per dollar to address forex shortages and support the naira. This move came amid high demand and an exchange rate exceeding N1600 per dollar.

The CBN’s initiative aims to address distortions in the retail forex market, reduce the parallel market’s rate premium, and stabilize the naira by meeting demand for invisible transactions.

CBN intervention

This is the fifth attempt by the CBN to sell forex to the BDC operators after a prolonged period of suspension by the apex bank in 2021 following allegations of illegal forex trading by these currency traders.

The ban was, however, lifted earlier in the year following the revocation of licenses of over 4173 BDCs in February.

The first attempt was in February 2023, with the CBN selling $20,000 to each BDC at the rate of N1,301/dollar, while the second attempt saw the apex bank reducing the allocation by 50% and sold forex at a rate of N1,251/dollar.

The dollar sales to the CBN licensed currency traders is one of the intervention measures by the apex bank aimed at boosting liquidity and stabilizing the forex market.

Others include periodic sales of dollars to authorized forex dealers and the recent reintroduction of the Retail Dutch Auction System, which saw the apex bank sell $876.26 million to end-users through the banks.

With the periodic sales of dollars to the BDC operators, the CBN appears to have yielded to pressure from the Association of Bureau De Change Operators in Nigeria (ABCON) who had advocated for participation in the foreign exchange market to help improve liquidity, especially in the retail end of the market.

They stated that their exclusion from the foreign exchange market and the lack of forex supply was causing the depreciation of the naira, insisting that without them the various exchange rate policies would not work.

Despite the CBN’s intervention in the forex market, the exchange rate is still high and volatile with the dollar trading at N1590 at the parallel market.

The BDC operators complained about the frequency of the dollar sales by the CBN, hinting that it is not enough the sustain the desired impact.

Lack of consistency

The President of ABCON, Aminu Gwadebe, in a chat with Nairametrics, acknowledged the immediate positive impact of the dollar sales with the appreciation of the naira.

He, however, noted that the lack of consistency in the exercise has led to the persistent volatility of the forex market with demand pressure and the weakening of the naira.

Gwadebe said, ‘’The problem is the streamlining, only once, is it on the 18th of July or so? Like you said about 3 weeks, till now not any sales again.’’

When asked if the CBN had redeemed the allocations to the BDCs as against the past when there were complaints of delays by the apex bank.

He said, ‘’That is true you know that after then, they resumed sales sometime in January, then around March, April, they withdrew completely and then in the middle of last month around 18th of July they came up with an announcement to sell $20,000. Before then the rates were hovering around N1650 or thereabout, so when they came out there was impact because the rate also came down to below N1600 to about N1580 thereabout.

‘’So you know the thing is continuity, once people know that it is not what is coming frequently, before you know it people will now lose confidence again because our customers cannot wait without any information as to when they will get forex after which they will get their ticket and then travel. So that really will push the pressure back to the parallel market, so that’s the problem.’’

On how often they want the apex bank to be selling dollars to them.

The ABCON President said, ‘’Every week, you know there was a time we were collecting three times a week, we want it sometimes twice a week, but even if it is once a week with frequency and volume and in line with cut-off time, so that will make everybody go to the market at the same time and the liquidity will come to the market at the same time. But if I know the window is open for one month for me to buy and with no cut-off time and then I am not sure when it will come again, people will not be encouraged to really come into the market.’’

Gwadebe added, ‘’There are some of us looking at it, you know the payment centres are centralized, so some people honestly you know are not encouraged because you will go today they will say come tomorrow, you will go tomorrow they will say come next tomorrow, so also the operational difficulty sometimes, even though they are trying to also improve on that to the extent you see some people they will pay in their money it will take them 3 to 4 days without even getting their payment (dollar sales), so those are some of the challenges.’’

(Credit: Naira Metrics)