President, Association of Bureau De Change of Nigeria, Aminu Gwadabe, x-rays the recent foreign exchange reforms carried out by the Central Bank of Nigeria and other issues in the interview with FELIX OLOYEDE
What is your assessment of the current reforms in the FX market by the Central Bank of Nigeria?
What has been happening is that the naira has been dancing naked in the market square. We have seen a lot of volatility. The volatility of the naira has continued to slow the economic growth in Nigeria. It is a severe issue. No country in the world will fold its arms when its currency is depreciated with the speed of lightning the way the naira has been depreciating. The way the naira has been unempirical. It is all about illegal human behaviours, speculation, hoarding and currency substitution.
Our economy is a dependent economy. We import most all our needs. But the discipline that is very important is lacking because Nigeria is not the only consuming country. The UAE doesn’t even produce water. They import the water they drink. Same thing with Saudi Arabia; the only thing they have is oil and their currency has not been bastardised as our currency. So, having given this narrative of how the naira has been battered, it is important for whoever that is in charge, is it the apex bank, is it the Presidency to look into this situation because it has really affected the economy negatively in terms of inflation. Our economy is a dependent economy, always what we have imported inflation. So, anytime we have currency depreciation, the end result is that we are also importing inflation, which makes it difficult for manufacturers to plan. What is important is not even the value of the naira. The naira can be 1,000/$ or 1,500/$. What is important is the stability of the currency to enable planning. Once the currency is volatile, nobody will be able to plan. People will be running after the dollar. Though they don’t need it immediately, maybe their school fees are due in July next year, because the exchange rate is not stable, so they will want to buy dollars now. There will be a rush; there will be anxiety and uncertainties in the market. This is the disadvantage of allowing your currency to be volatile.
Due to these issues, the government decided to come up with some measures to address them. Part of the measures is to address global perception of the economy, which has made a lot of foreign portfolio investors exit the country, which has affected our inflow of forex seriously.
We have about four major sources of foreign currencies because we don’t produce dollars, but we will earn dollars. We earn dollars through the sale of crude oil, remittances, portfolio investors, and export proceeds. The only source that remains relevant is the crude oil sources. Even with crude oil sources for the past 30 years, I have been hearing our OPEC quota is 2.1 million barrels per day. We have not been able to meet the 2.1 million barrel target. In Diaspora remittances, there are a lot of fintech in that space. The former acting governor of the CB had to come out and say that he was not seeing the inflow into the economy. It was being diverted by illegal fintech companies.
The portfolio inflow that comes in more frequently is also being challenged due to this backlog that we are talking about. The contribution of non-export proceeds to our economy is minimal. And demand keeps growing. What do they have to do? First, they need work on the battered image of the country, because the image of the country has been battered by election related issues and insecurity. A lot of the investors have left. And Article 8 of the IMF states that no member country should enforce capital control. The restriction of the 43 items is more like capital control, which is against article 8 of the IMF. This puts Nigeria in a very precarious situation. The country has been downgraded. So, to address that challenge of perception, they had to comply with Article 8 of the IMF by unbanning those 43 items. And as soon we did that, that was when you heard that the World Bank and other multilateral institutions were willing to give us loans, to ensure that there was liquidity.
Secondly, they have also come with executive orders. First is the conception or forbearance. There is an estimate of over $50bn in people’s houses in this country that is outside the banking system. So, it is just like repatriation. How do you get this money under the pillow, from the boot of cars into the formal economy?
How do you come about that figure?
From 2014 till date, the kind of naira supply that has been in circulation, putting pressure on the dollar, automatically, in fact, I even underestimated the figure. There is an unconfirmed report that said from 2014 till 2023, there is about $1tn dollars in people’s homes. So, I just want to be very conservative with the figure. So how do you bring this money out, they came up with the issue of forbearance. Bring it out and put it in the formal economy and there is not going to be any questioning. No security agency will ask you questions about the sources of that money. They also came up with the issuance of local foreign currency instruments. Why do people even convert their naira to dollars to hedge against inflation? There was a time when the interbank rate was flat, it was even zero. So the banks were having the naira, they didn’t even know where to keep it. When there is inflation, the manufacturers are not even paying for their loans. So, the easiest way is to buy dollars and keep. So, they came up with foreign currency savings instruments issued locally so that people can come and invest in those instruments to reduce the money being kept outside in the banking system.
Then, there is the recommendation of the Fiscal Policy and Tax Reform Committee, thereby, some clarifications began to emerge. And the clarification is that the government through its relevant agencies will expand the foreign exchange market and include the bureau de change and fintech.
Over time, the bureau de change has been playing a moderating, and correcting roles in the FX market. They are the third leg. So, any time you want to exclude the bureau de change, what you are doing is denying the retail sector of the market liquidity. The purpose of allowing the bureau de change to participate in the market is to ensure there is liquidity in the retail end of the market. If you want to travel with $2,000, $3,000, you don’t need to go to the bank. You visit a bureau de change and get it. If you want to pay school fees of $2,000 to $3,000 dollars, you don’t need to go to the bank. You visit the bureau de change and get it. So, these are some of the ways to deepen the market and inject liquidity into it. BDCs have been playing a significant role in ensuring there is liquidity in the retail end of the market and closing disparities between the officials and the parallel markets.
July 21, 2021, when bureau de changes were suspended from the official segment of the market was the beginning of disparity in the market. Up till now, it has not been addressed because the third leg of the market is still not being considered.
But when BDCs were still getting allocation from the CBN, there was still disparity in the market.
There are some structural problems. I agree with you to some extent, but I can also give you some other examples where the gap was closed. In 2006, when they allowed BDCs with Visa to deepen the market, the parallel market was going for about 150/$ and the official market about 110/$-120/$. Within one month, that gap has been closed to only about N50 to N100 difference. In 2015/2016, when we were having a recession and we had no inflow, the management of the central bank then asked us what was the way forward. We saw that hanging fruit was Diaspora remittance, which was not linked to the reserves. We started harnessing the Diaspora remittances. That was how the rate was stable from 2017 till 2020. The difference was only about 50k or N1. I can still remember vividly. For three years, it was stable not until the advent of COVID-19, which came with supply disruption.
Currently, do you get allocation from the CBN?
There is no allocation to any licensed bureau de change. You can get dollars from P2P platforms and the rules governing the bureau de change do not allow us to be on an electronic and online trading platform. You asked me to go and source for my dollars anywhere, but you did not give me the enabling environment to do that.
Do you think part of the problem is that there is no punishment for currency speculators?
One of the reasons we were ‘grey-listed’ by the Financial Action Task Force was that Nigeria does not have strong penalties for non-compliance. So, the CBN and some security agencies have been making a lot of sensitisations to compliance agencies, like banks and BDCs. A lot of penalties have been issued to many BDCs as we speak. Some are still under investigation. The issue is not just about speculation, even ownership is another issue. There should be a review of bureau de change ownership structure.
By ownership structure, what do you mean?
Who are the people who are having these BDC licences? We have heard of how politicians get BDC licences. How do you expect compliance when the licensing is in the wrong hands? It will be very difficult for the regulators and association to manage such a situation. So, it is good to enforce penalties and sanctions for non-compliance. As a set regulatory organisation, we want people to comply with the rules and regulations.
How many BDCs are under investigation?
The investigation is tracing money from banks to BDCs that are under investigation. They are usually prosecuting witnesses. As a BDC operator, I am allowed to sell or buy forex from anybody. The challenge is that some BDCs lack recordkeeping. That is the challenge security agencies have with some BDCs.
You recently warned speculators would have their finger burnt and we have seen that lately. How sustainable is this?
What speculators are after is sustainability. There are four elements to foreign exchange determination: The supply of dollars, the demand for dollars, the supply of naira, and the demand for naira. We can see the supply side improving. The market is driven by information. This information has made a lot of speculators burn their fingers. Yes, continuity is very important. It is going to continue so far as the CBN continues to be proactive and engage with the stakeholders. There are a lot of opportunities we are not tapping. For instance, a lot of Nigerians are on Binance. Binance is a very liquid market. So, let us domesticate the platform. We have creative Nigerians. Even the association has given a lot of proposals to the Central Bank of Nigeria on domesticating the platform. Today, there is no challenger to Binance in Nigeria.
In August, the CBN ordered that BDCs should trade not higher +-2.5 per cent , but there are some reports that BDCs are snubbing this directive. How do you react to this?
We need to have some kind of distinctions and clarifications. Sometimes we generalise the bureau de change, which makes people stigmatise the licensed ones that are not even operational. I am the president of this association and I can beat my chest and say that 90-95 per cent of my members are not even in business as we speak because it is a model that was purely defendant on the CBN window. That is the model of the business. When there is no CBN window, then you close shop. Even if you want to operate, how do you want to comply with the I&E window rule when you don’t sell dollars to you at the I&E window? There is no patriotism in capitalism.
