Bridging inter-bank, parallel market rate: The CBN dilemma

The ban on the 41 items by the Federal Government in 2015 has made the demand for foreign currencies at the black market and BDCs even higher in 2016.

The items include rice, cement, margarine, palm kernel, poultry products, meat, fish, wooden doors, steel nails.

According to the CBN, the measure is to encourage local production of the items and simultaneously conserve the nation’s depleting foreign reserves.

This measure has forced several legitimate business operators that import some of the banned items to patronise the segments.

When demand for foreign currencies is more than supply, it creates a widening gap within the inter-bank rate, Bureau de Change and black market.

Financial experts, however, believe that such gap makes it tempting and possible for speculators to buy at the cheaper rate through the inter-bank window and sell at the more expensive rate through the black market.

In recent times, there seems to be too thin a line between the Bureau de Change and black market operators because often times, BDC operators double their rates to further create uncertainty in the foreign exchange market.
When the dollar was going for an average of N197, it was selling at these segment for about N300 and when the new flexible exchange rate was introduced, the price went up to an average of N480 to a dollar.

However, prices at the inter bank rate have remained stable with dollar trading at an average of N307 to a dollar since the introduction of the flexible exchange rate in June, 2016.

Recently, the CBN Governor, Mr Godwin Emefiele, in a move to regulate prices at the BDCs, directed banks to sell Diaspora remittances to BDCs. They were to get 50,000 dollars every week at the rate of N390 and sell at N400.

To ensure compliance, the Department of State Services embarked on an operation to arrest BDC operators selling above the stipulated N400 and cases of this happened in Lagos, PortHacourt, Kano and Kaduna.

However, market operators and financial experts expressed the view that the operation only succeeded in putting fears in the system as many operators went underground.

As ales of foreign currencies turned underground, with many of them refusing to sell at the fixed price of N400, scarcity of Forex became more pronounced and threw the market into confusion and uncertainties.

In all nooks and crannies of major cities like Zone 4 in Abuja, the Murtala Muhammed International Airport in Lagos, Hamdala Hotel in Kaduna and WAPPA Market in Kano, black market operators had a field day, selling a dollar at N480 under ground while the market remained shrouded in secrecy for some time.

But the Minister of Finance, Mrs Kemi Adeosun, raised the hope of addressing the irregularities when she said that the CBN would try to eliminate the gap between the official and parallel market exchange rates against the dollar.

“The CBN is working on the elimination of arbitrage in the market,” she said.

Adeosun advised the CBN to revisit its stance on the foreign exchange restrictions placed on the 41 items in the country in order to reduce demand pressure in the parallel market.

The CBN spokesperson, Mr Isaac Okorafor, said the bank was working towards “ensuring that the Forex market operates as effectively as we would envisage”.

However, a CBN official, who preferred anonymity, told the News Agency of Nigeria (NAN) that the apex bank could not eliminate the parallel market as it had no control over the segment.

“CBN does not print dollar and it is the shortage in circulation that is making the price to sky rocket in the parallel market; so it will be difficult for CBN to do anything about that segment.

“It’s a shame because the black market is something that is done in hidden in other countries, yet in Nigeria you find unlicensed people selling foreign currencies on the street, under the trees and even in the banks.

“The BDCs that should know better, are doing the same. They collect licence from us to get dollars at an affordable rate, but instead of setting up an appropriate establishment, they prefer to sell under the tree too,” the source said.

The President, Association of Bureau De Change Operators in Nigeria, Alhaji Aminu Gwadabe, said eliminating the black market was possible if the CBN strengthened the BDCs to meet Forex demand at the retail end of the market.

He said that the apex bank’s refusal to fund the segment with Diaspora remittance as directed by the CBN had negatively affected the market as customers were forced to look for alternative funding from black market operators.

Although the CBN governor says the parallel market is irrelevant as it accounts for an insignificant percentage of the foreign exchange market, observers in the finance sector are of the opinion that nevertheless bridging the gap is important to the nation’s economy.

Therefore, economic experts are expressing the view that the black market is important to an average Nigerian because that is where they access foreign currencies to travel abroad on tourism and for small business owners to restock their shops.

Consequently, it is believed that many small businesses died in 2016 because their operators depended on price of dollar at the parallel market.