One of the reasons the Central Bank of Nigeria (CBN) replaced the Wholesale Dutch Auction System (WDAS) with the Retail Dutch Auction System (RDAS) was to curb the dollarisation of the economy by bureau de change (BDC) operators.
The CBN withdrew the licences of 236 BDC operators on January 14, 2013 because of the challenges posed by the WDAS and alleged abuses by BDCs.
Later in the year, the bank realised that its action did not change anything, re-introduced RDAS on October 2, 2013, and closed down about 20 additional BDCs.
New guidelines
A fortnight ago, CBN Governor, Godwin Emefiele, raised the capital base of BDCs from N10 million to N35 million to ensure only genuine ones operate.
The new guidelines stipulate a cautionary deposit of N35 million, lodged in a non-interest yielding account in the CBN upon approval in principle.
Application for BDC licence costs N100,000, licensing N1 million and annual renewal N250,000.
The CBN raised concern that BDCs use foreign exchange (forex) purchased from its window to fund unauthorised transactions, noting that the large number of BDCs contributes to the depletion of foreign reserves.
BDCs are to comply with the new requirement of N35 million deposit by July 15, 2014. Multiple ownership of BDCs is banned.
The new guidelines aim to check the financing of unauthorised transactions and the dollarisation of the Nigerian economy.
The House of Representatives reacted by asking the CBN to suspend the new rules and summoned Emefiele to appear before its Banking and Currency Committee, chaired by Jones Onyereri, “for a full brief on the policy somersault.”
BDC operators also called for clarification on the new capital requirements.
A total 3,208 BDCs were licensed as of April 2014. Many are believed owned by people with multiple licences. The CBN claims there is no trace of billions of dollars sold to them and that each has multiple money-changers operating under its cover.
There are concerns that since BDCs cannot account for the billions of dollars sold to them, the money is either laundered or used to finance illegal activities, especially terrorism.
Sources in the CBN said more people are seeking licences, which may increase BDCs to about 5,000 this year.
Every six months, $3 billion is sold to BDCs but what reflects in their books are only commissions realised from sales. There is no record of dollars bought by travellers and importers, according to the CBN.
The question is: who buys them and on what is the money spent?
BDC operators react
A statement jointly issued by Association of Bureau de Change Operators of Nigeria (ABCON) acting President, Aminu Gwadabe, and National Secretary, Uduma Cletus, faulted the position of the CBN.
ABCON said the new policy
• Will further weaken the naira, heighten inflation, throw about 35,000 workers out of jobs and increase poverty.
• May crush most BDCs, destabilise the forex market, empower the black market and widen the exchange rate premium.
ABCON argued that a 1,000 per cent increase in cautionary deposit will boost the black market and ensure the return of exclusive group ‘A’ BDCs.
“The mop up of N35 million mandatory cautionary deposit per BDC for about 3,500 BDCs across the country is almost half the size of the Nigerian budget.
“This chunk of resources will be in a non interest yielding account, which is counter-productive as the mop up will give the government more money and impoverish the majority of citizen, resulting in a decrease in their consumption level, savings and ability to invest,” the statement said.
ABCON insisted that a lack of fiscal discipline is the major cause of the depletion of foreign reserves, not the volume of dollar sold to BDCs.
In its view, the depletion of the reserves is due to a combination of import dependent economy, mono culture economy and circulation of high powered money.
“For example the annual and quarterly economic reports of the CBN show that out of the $26.82 billion sold by the CBN in 2012, $5.55 billion, representing 19 per cent, was sold to BDCs.
“Similarly, out of the $33.3 billion sold by the CBN in 2013, $5.31 billion, representing 15.9 per cent, was sold to BDCs,” ABCON pointed out.
It argued that in the first quarter of 2014, out of $14.8 billion sold by the CBN, $1.7 billion (11.4 per cent), was sold to BDCs, reiterating that the percentage of dollar sales to BDCs has declined since 2012.
“This indicates that the BDCs are not responsible for the depletion of the external reserves as noted by the CBN circular.”
ABCON said the dollarisation of the economy is a direct outcome of the CBN directive that proceeds of international money transfer be paid in foreign currency.
It also blamed dollarisation on the elite who own property in prime areas of major world cities and charge dollars to rent out.
It added that current charges on withdrawal of naira cash from banks above the threshold – which attracts 3 per cent for individuals and 5 per cent for corporate bodies – makes the operation of domiciliary account cheaper and attractive, thus increasing dollarisation.
ABCON equally cited Nigeria’s porous border, oil theft, oil bunkering proceeds, lack of naira convertibility in the West African market and the refusal of banks to accept confirmed letters of documentary credit by some countries as factors that help to increase the inflow of unofficial dollar.
CBN wields the big stick in 2014
After the CBN revoked the licences of 20 BDCs in September 2013 for forex malpractices, the CBN early this year revoked the licences of another 101 BDCs for alleged involvement in money laundering and other financial infractions.
The CBN said BDCs had inadequate documentation on forex purchased from banks and did not produce satisfactory evidence of the purchase and utilisation of autonomous forex.
Seventeen other BDCs were fined N2 million each for violating guidelines.
Those fined had satisfactory evidence of the purchase and utilisation of autonomous forex but did not stick to other guidelines.
A bureaux de change is a non bank corporate body licensed to buy and sell foreign currency in accordance with the Foreign Exchange Act of 1995.
The number of players has risen from 300 before the introduction of forex liberalisation in 2006 to over 3,000.
Between WDAS and RDAS the new foreign exchange regulatory system varies significantly from its predecessor.
The RDAS pegs a minimum bid of $100,000 against $500,000 in WDAS.
The new regime also embraces technology for efficient transaction by compelling authorised dealers to submit bids in USB memory sticks (flash drives) in pre-defined Excel spreadsheet format, as against sending in bids via Reuters Dealing 3000 Xtra system to the Abuja dealing line.
The CBN assured that RDAS would address forex abuses in WDAS by BDC operators.
Why RDAS was re-introduced
RDAS was re-introduced to ensure exchange rate stability, one of the key mandates of the CBN, which adopts different measures of currency management.
RDAS was among five forex market regulations in operation before 2006, which the CBN used to manage the depreciation of the naira.
But on February 20, 2006, the CBN introduced WDAS, saying it would provide succour in forex. It hoped WDAS would unify exchange rates, including inter-bank rates, parallel market rates and official rates; and stabilise exchange rate to promote growth and inward development.
The CBN also wanted WDA to further liberalise the forex market as a long term strategy in making the naira a convertible currency.
WDAS inadequacies
The advantages of WDAS notwithstanding, the naira remains at the receiving end of abuses in the system across all segments of the market, leaving it fluctuating between the official rate of between N155 and N162 to the dollar, which compelled the CBN in 2013 to dip its hands into foreign reserves to defend the naira against pressure.
WDAS was believed to have loopholes exploited by money launderers and RDAS was reintroduced.
The CBN stated in its 2013 third quarter economic report that Russia was the biggest importer of the dollar before Nigeria took the position in 2013 under WDAS.
Naira depreciation continues
Since the announcement of the new guidelines, the naira has maintained a steady depreciation, exchanging between N156.5 and N158.7 to the dollar. Some operators attributed this to the planned recapitalisation.
Matthew Eze, a BDC operator at Trade Fair Complex Lagos, said there is acute disparity between supply and demand for the dollar, leading to arbitrary rates across the forex market.
Analysts at Afrinvest Securities stated in a report that the ability of the CBN to follow through with the policy would be tested.
“Following the repeal of the dollar supply limit to the BDCs nonetheless, the gap between the interbank and BDC market eased to N3.90 in June and remains at benign levels.
“In view of the deadline for the compliance of the policy we anticipate further widening between the ‘street rate’ and interbank rate,” it stated.
