Financial experts were divided over CBN’s dollar sales to BDC operators

Financial experts are divided over the decision of the Central Bank of Nigeria (CBN) to sell dollars to Bureau De Change (BDC) operators below market interest rates. Some question its transparency and others say it would increase liquidity in the foreign exchange market.

The recent dollar sales to BDCs below the market rate of N1,101/$1 was the third attempt after a long period of suspension by the Central Bank of Nigeria (CBN) in 2021.

In an exclusive interview with Nairametrics, the experts expressed mixed feelings about the ability to support the initiative.

Some analysts criticized the Central Bank of Nigeria (CBN)’s handling of the Naira floating policy, citing its inability to establish a transparent and efficient internal foreign exchange market.

They noted that CBN’s selective sale of hard currency to banks and Bureau de Change operators is devoid of transparency and sustainability, and stressed the importance of market mechanisms for efficient allocation of resources.

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However, there are others who support the sale of foreign exchange by CBN to Bureau de Change operators. While recognizing the short-term benefits, they advise the CBN to focus on increasing foreign exchange earnings to safeguard reserves.

According to them, the sustainability of the initiative depends on better supervision and larger foreign exchange reserves.

Recommended Reading: CBN Sells Dollars to BDCs Below Market Rates at N1,101/$1

CBN’s recent dollar sales to BDCs

Nairametrics recently reported that the Central Bank of Nigeria (CBN) issued a circular to the operators of Bureau De Change (BDCs), informing them of the sale of $10,000 to each BDC at the rate of N1,101/$1.

Under the circular, each BDC is directed to sell the dollars to eligible customers at a rate not to exceed 1.5% above the purchase price.

This suggests that BDCs are not expected to sell above N1,117/$1. The selling rate is below the N1,251.05/$1 recorded late last week, according to data from the Nigerian Autonomous Foreign Exchange Market (NAFEM).

This is the CBN’s third attempt to sell currency to BDCs after a prolonged period of suspension by the central bank in 2021. The ban was lifted earlier this year following the revocation of the licenses of over 4,173 BDC operators in February.

What market experts say

David Adonri, Managing Director of Highcap Securities Limited, in an exclusive interview with Nairametrics, expressed concern over CBN’s handling of the Naira floating policy, stating that it has failed to establish a transparent and efficient internal foreign exchange market to take.

Adonri stressed the need to create a market structure that allows all economic entities to participate in the buying and selling of foreign exchange through authorized market operators.

He argued that such a structure would effectively allocate hard currency to different competing needs and provide a single market clearance rate that accurately reflects the true value of the Naira.

Highlighting the current shortcomings, Adonri pointed out that the CBN’s approach involves selective selling of hard currency to banks and Bureau de Change (BDC) operators, which is not transparent and prone to illegal transactions.

He criticized this strategy as flawed and unsustainable in stabilizing the Naira.

  • “The selective sale of hard currency to banks and BDCs by CBN is not transparent and prone to shady deals. It is a flawed strategy that cannot sustainably stabilize the Naira.
  • It is contrary to the policy objective of allowing the market mechanism to allocate scarce economic resources in the economy to achieve efficiency,” he said.

Victor Chiazor, Analyst and Head of Research at FSL Securities Limited, in an exclusive conversation with Nairametrics, also expressed support for CBN’s decision to continue selling foreign exchange (FX) to Bureau de Change (BDC) operators . He believes that this move is aimed at increasing dollar liquidity within the system and strengthening the Naira against the dollar.

Highlighting the recent actions of the CBN, Chiazor noted that the central bank has consistently sold dollars to BDCs at discounted rates, with the latest sale reportedly at about N1,101/$1 per dollar.

He suggested that this strategy is intended to signal to the market that the Naira is undervalued and that the CBN is committed to meeting the demand for dollars for approved invisible transactions.

  • “The CBN will, however, have to improve its foreign exchange earnings to avoid weakening its foreign reserves,” he said.

Experts defend CBN

Tajudeen Olayinka, an investment banker and stockbroker, said the CBN is pursuing a multi-level strategy aimed at securing the stability of the Naira.

According to Olayinka, the CBN’s approach includes incentives such as interest rate adjustments to attract foreign portfolio investors, offering government bonds at significant amounts to maintain high interest rates, and providing direct dollar allocations to BDC operators to curb irregular behavior within the market or to minimize.

He highlighted the complexity of CBN’s strategy and expressed confidence that the central bank has implemented appropriate mechanisms to ensure its sustainability.

However, Olayinka warned that failure to maintain these mechanisms could lead to disastrous consequences.

Olayinka noted that the sustainability of the CBN’s strategy depends on its ability to pressure the government to increase both crude oil production and exports of non-oil products.

He believes that once these factors are optimized, speculative attacks on the Naira will diminish significantly.

On his part, Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), commended the decision of the Central Bank of Nigeria (CBN) to provide liquidity to the retail side of the foreign exchange market. FX) market.

According to him, this move is beneficial as it addresses the need for liquidity while reducing market disruptions.

Amolegbe said the initiative is sustainable as the CBN has implemented measures to clean up the retail FX platform and is closely monitoring the activities of market participants.

He emphasized that this approach gives the CBN insight into actual demand, which will help dispel misconceptions about the size of the currency disbursed.

Amolegbe also pointed out that the current increase in Nigerian foreign exchange reserves is strengthening the position of the CBN, creating more war chests than in previous periods.