By Victor Ogiemwonyi
The decision of the Central Bank of Nigeria (CBN ) to allow Bureau De Change operators ( the retail end of the FX market) to buy up to $25k on the official market (The EFEM widow ) is a well thought out strategy, to moderate Naira FX Exchange rates.
In my opinion, the experiment which the CBN started on the 19th of December, 2024 and expected to end by 31st January, 2025, should be allowed to stay. This will ensure FX supply to this very important segment of the market, which will moderate our FX Exchange rate for the Naira.
We have observed that, this end of the market, has the tendency to stoke up prices, as we have seen, in the prices in that segment of market. They are consistently higher than the official CBN rates and we always see moderation in prices, whenever the CBN intervenes and supplies dollars to that end of market.
The Bureau De Change segment of the market, is the most accessible and for same reason, the most frequently patronized part of the FX market, by users,.
Despite, its small size, it is the most sensitive to price movements and sets the rate for the FX market.
The role of Bureau De Change, can be likened to convenient stores in Neighbourhoods vs Supermarkets. Their offering is more expensive, but convenient for users.
For instance, the requirement for documentation, usually required for official FX purchases in Banks, are not required here. This makes them attractive to users, and also convenient.
I think the only requirements here, should be, for users to observe the KYC rules, for purchases, that are higher than $10k. Such transactions should require documentation, of who is buying, and where is the FX going, for record purposes only. There has been a suggestion that, amounts bought, higher than $10k, should be by transfer only.
For instance, payment for school fees and health needs, which fall below the $100k minimum, required to participate in the official EFEM market, should all go to the Bureau De change end of the market.
This retail end of the market, is like what Micro Finance Banks, are in the Banking Industry and lately, Fintech Companies.
CBN broader intervention, by funding this end of the market, is important in moderating rates, because there are more participants here, and the price for daily FX rates are set here. Funding this end of the market, has more benefits than negatives. incorporating them, into the bigger FX market system, will help in increasing supply of FX from the official market, to that segment, and will lead to price discovery and moderation of FX rates. The total outlay of FX to this segment of the market, is insignificant, but significant in its impact on the market. Supply allocation to this segment of the market, will ensure, supply meets demand, in this broader market and it will ensure, prices are moderated.
ALSO READ:Creating Demand For The Naira.
First, the Bureau De Change current licenses will have to be Reviewed and sanitised, to make sure, these are proper businesses and run by responsible people. The current move by the CBN, to raise Capital requirements and put proper structures in place, preparatory to formally incorporating them into the FX market system, is a move in the right direction. The CBN must however make sure that, there is free entry and free exits, with clear rules, so those who want to be part of a better organised market, can come in and those who want to exit, should also be free go.
A better organised market will be beneficial to all, both to those who provide Bureau De Change services, and those who use it. The CBN must be careful not to unnecessarily upset the Apple cart, like the last CBN did, with Domiciliary Account operations, when they unintentionally created uncertainty, that created more problems than any benefits. They brought in complications in the operations of Domiciliary Accounts, just when it was getting established, as something good, and contributing to proper management, of the FX market. This was a big mistake.
If you look at the data for deposits into Domiciliary Accounts and operations, at that time, there was significant deposits, reaching about $25b which helped in stabilising FX exchange rates, in that period. This deposits in the various Accounts in our Banks, was almost 50% of CBN FX Reserves in that period. This was a very important subsidy, to the official FX available to the market. It also helped, that the spread of the deposits in many customer Accounts, made it effective in its distribution and use, by various customers. It became the first stop for users who were paying school fees, travel spend and other small need users. This effectively, removed pressure from the official market. It was also growing, and the free entry and free exits of these deposits, made it convenient for users. There was no documentation required and you could pay in cash and withdraw cash, until some falsely thought, this was where the politicians , kept the money they stole, and needed to be blocked, without any thinking for how it will affect the economy. After the response from users, resulted in flight to safety, and the deposits depleted immediately. Subsequent, reversal of policies to bring them back, has not worked well. Though we now have up to $26b in deposits, because of the relaxation of its operation, by the current CBN. We could have had more than doubled this current size,without the unnecessary interruptions.
The key to getting the benefits of a good policy, is when it is clear, and consistent. I had written in July of 2023, that for the current reforms, to work, policy stability will be key. The time required for price discovery for the Naira, will be longer than we think. While we are not there yet, we are on our way there. The CBN has done well not to panic, and have been consistent, in making policies, to enhance the market. I had also predicted at the end of 2023, when the Naira first crossed the N1000 to the dollar mark, and many were scared, we were heading into a currency crisis, I said then, that my expectation for the price of the Naira, will be around N1500 to the Naira. This was no crystal ball, it was based on just looking at the relative strength of other currencies of countries similar to Nigeria’s economy. The South Korean currency the “ WON “ for instance, exchanges for 1350 to 1 US dollar, despite its more productive economy and lower population. It will be irrational, to expect the Naira to trade higher . I suspect, we will have to live with this current rate, that will range from N1500 – N1600 for sometime.
It is interesting that this year’s Budget for 2025, is using N1500 as its exchange rate for converting Dollar earnings to the Naira.
The response of the economy so far, seems to have confirm , that realigning the Naira with real market price, is the right thing to do. We are exporting more, importing less and achieving a better balance of payment, for our economy.
Growth has also started to sprout. We have a long way to go, we must stay the course.
Victor Ogiemwonyi is a retired Investment Banker, and writes from Ikoyi Lagos.
