In July 2021, there was a significant change to the foreign exchange regime in Nigeria as the Central Bank of Nigeria (CBN) announced the discontinuance of foreign currencies sale to Bureaux de Change (BDC) operators in Nigeria. Additionally, the apex bank suspended the application for and issuance of new licenses for BDC operators in the country.
The action according to the CBN was in line with its mandate to ensure the maintenance of the country’s foreign reserves as well as the stability of exchange rates, as the apex bank aimed to curb the observed unlawful financial practices by some BDC operators.
While the change in the foreign exchange regime was expected to give the needed breather for the stability of the naira, the reverse is the case. As of July 2021 when the ban took effect, the exchange rate was about N505/$. Today, the rate stands at N650/$, an alarmingly high premium in the FX market.
Also, as of this same time in July 2021, the country’s gross foreign reserve was $33 billion. Currently, Nigeria’s foreign reserve stands at $39 billion according to CBN’s data on foreign reserves. The increase in the foreign reserve is a result of the rising oil prices and the Eurobond issuance. by the federal government.
What this means is that the country’s foreign reserve is not growing at a reasonable or expected pace and CBN’s focus should be on increasing its foreign exchange earnings to ease the pressure on the naira in the forex market.
What Analysts Have Observed
- The CBN’s ban on sales of forex to the BDC may have helped to dial down on some corrupt practices in the system. However, arbitrage and round-tripping still happen because of multiple exchange rates in the country’s foreign exchange market. Also, the central bank’s restriction of the free movement of non-export foreign exchange proceeds in and out of the country has had a knock-on effect on the forex market.
- According to Mr. Ogunsusi Akinyemi, head of operations at Sonora Capital and Investment Ltd, “the clampdown by the CBN on independent sources of foreign exchange impedes the free flow of non-export foreign exchange earnings, thereby limiting the availability of the greenback in the country.”
- The country has remained an oil-dependent economy from the foreign exchange perspective, and with the level of foreign exchange earnings, the government is not having enough foreign exchange that can satisfy the yearnings for the greenback at the local level.
Generally, banning sales of foreign exchange to the BDC has simply put more pressure on the naira as getting the dollar is now more difficult than it was a year ago. The apex bank needs to take a countervailing measure of improving liquidity in the official market by increasing the supply of dollars to the market.
