Nigerians were greeted with shock last week Tuesday following the announcement made by the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, during the 137th Monetary Policy Committee (MPC) briefing, where he announced the decision to halt the sales of forex to Bureau de Change (BDC) operators.
The CBN hinged this recent move on the perpetual quest by the BDCs to connive with other non-state actors to create artificial scarcity and distort the stability in the forex market. This connivance is in a bid to satisfy the profiteering motive of the BDCs. For example, while the official exchange rate at the I &E window is below N450/$, the BDCs in the parallel market have traded far above this official exchange rate, thereby causing a wide disparity between the official and non-official rates, distorting the market equilibrium enroute.
In a bid to address the illiquidity and instability issues inherent in the forex market, the CBN announced that henceforth, only commercial banks will be allowed to sell forex. The forex will be made available to Nigerians for productive reasons and only to those who tender necessary supporting documents. Furthermore, the CBN in a subsequent circular instructed banks to set up points of tellers for the trading of forex at designated branches nationwide. These trading points should be published to the respective customers of the banks.
Demonstrating its readiness to implement this directive, the CBN commenced the refund of capital deposits of N25 million to BDC promoters with pending license and further warned that banks that fail to make forex available to customers who meet the requirements will be severely sanctioned. The banks on their own part met to assess their capabilities and came up with a resolution that they are fully ready to meet up with the challenge.
What CBN plans to achieve with the recent directive
Given dwindling revenue and the hard-biting impact of the COVID-9 pandemic on virtually all sectors of the economy, it is unanimously believed that this is not the best of time for extravagant or irrational forex spending. The CBN with the recent policy aims to control and regulate forex supply so as to align with its macroeconomic objectives. With only commercial banks to monitor, this goal will be easily achievable unlike when the apex bank has to monitor over 5000 BDCs in addition to commercial banks.
Secondly, it will be easier for the CBN to correct market anomalies and ensure convergence to the state-determined (Fixed) equilibrium exchange rates through price targeting. With the increasing dollarization of the economy, subversion of the cashless policy and common ownership of several BDC by the same owners in a bid to obtain FX, the CBN believed that if some of these malpractices are left unchecked, the consequences will be too grievous to bear, hence the state intervention.
How innovative is the recent CBN directive?
Naijabusiness.com.ng learned this is not the first time that CBN will halt the sale of forex to BDCs. It did the same thing in January 2016, citing similar reasons. Sequel to the FX restriction, the following occurred;
- After the ban of BDCs from buying and selling dollars, dollar scarcity remained at the retail and wholesale segments of the FX market.
- This created both artificial and real scarcity for forex, hence driving people back to the black market to get forex.
- Given the scarcity, some people took advantage of the arbitrage opportunity by struggling to get forex from the official market, hoarding it and reselling at exorbitant prices at the black market.
- This created a spiral effect that worsened the situation, depreciating the exchange rate. In fact by 31st of December 2016, exchange rate deteriorated to N495/$1, against an initial N268/$1 recorded on 11th of January, 2016, indicating a devaluation rate of about 46%. By 2017, the exchange rate had reached a record high of N505/$1.
To curtail this, the CBN introduced a policy that enabled it sell Open Market Operations (OMO) Bills to foreign and local institutional investors at very high interest rates, thus attracting more foreign direct investment. With the country earning more in terms of dollars, the exchange rate moderated to about N363/$1.
If history is to repeat itself, then it is believed that exchange rate will probably nosedive like it did in 2016. Testament to this is what occurred on Wednesday 28th of July, 2021 (24 hours after CBN’s recent directive), the Naira traded N525/$1.
It is pertinent to highlight that small business currently operating in Nigeria will be impacted by this recent directive of the CBN. Despite struggling to cope with paucity of funds, limited infrastructure, unfriendly business environment and impact of COVID 19 pandemic on their bottom line, it is most likely that business operating in Nigeria will come up with a contingent plan to mitigate ‘Currency risks’ emanating from the recent directive
Impact of the recent CBN policy on small businesses in Nigeria
Regardless of the long run impact of the CBN’s directive, it is most likely that due to time-lag constraints, businesses will be affected in the short run, as they struggle to understudy and adjust to the new realities. The businesses that are likely to be immune against this policy shock are businesses that have before now, come up with plans to mitigate or curtail the impact of the currency risks.
It is a well-known fact that most businesses (especially small scale businesses) in Nigeria are not proactive in planning for this kind of recent development, hence the rationale behind this write up. These businesses are to plan for the new exchange rates which might be lower or higher and even anticipate scarcity of dollar.
Per adventure if status quo is maintained and there seems to be artificial or real scarcity of dollar in Nigeria, this will affect businesses that rely on the importation of capital equipment and raw materials for their operations. Given the envisaged increase in the cost of importing these items due to devaluation of the exchange rate, businesses will have source or plan for additional capital to meet up with import needs and will most likely pass on the increase in its cost of production to customers in form of high prices.
What should businesses do to mitigate these imaginary risks?
Given the uncertainty arising from the recent policy by CBN, it is advisable that an entrepreneur do the following to survive in the suffocating business environment.
- Do not panic into buying dollars when you don’t need them, as this will most likely lead to hoarding or artificial scarcity in the market.
- Be Innovative: Explore local contents and raw materials, attract and retain forex and try as much as possible to save the hard-earned forex.
- Explore hedging strategies: Hedging strategies can protect the foreign investment from currency risk for when the funds are converted back into the investor’s home currency. For example, the Currency Exchange Traded Funds (ETFs) can be used to mitigate a portfolio’s exposure to the performance of a currency exchange rate.
- Enter into a forward contract: The forward contracts provide a rate lock that can assist in the conversion of dollars back into Naira at a later date. It is an agreement between two partied to buy or sell a currency at a present exchange rate and a predetermined future date.
- Leverage on Currency Options: The ‘’currency options’’ gives you the right but not the obligation, to buy or sell a currency at a specific rate on or before a specific date. It is similar to a ‘forward contracts’, but the company is not forced to complete the transaction when the contract’s expiration date arrives. It is pertinent to note that this comes with an upfront fee or premium.
Lastly consult a financial expert or adviser for more guide.