CBN ban on Forex to BDCs: High Inflation, Chaos, Woes Loom Across Sectors

CBN ban on Forex to BDCs: High Inflation, Chaos, Woes Loom Across Sectors

* Prices of petroleum products, other imports will increase – Experts

* Manufacturers, shippers anticipate scarcity, forex hike

By Kenneth Jukpor

Nigeria’s economy is set to slide into a steep inflation following the Central Bank of Nigeria’s (CBN) recent ban on sale of forex to the Bureau De Change (BDC) operators, as experts predict an impending hike in the prices of petroleum products and all imported items with expected increase in shipping costs from delays in processing forex under the new policy.

The nation, which is yet to recover from the debilitating economic effects since the outbreak of COVID-19 pandemic in 2020, has millions of Small and Medium Sized Enterprises (SMEs) which require forex on daily basis and can’t meet the requirements or survive the longevity of the banking structure.

Some analysts have also expressed worries that the new monetary policy may breed new corrupt practices in the banking system as the demand for forex and the financial institutions’ creed for profits may herald sharp practices at the banks which CBN sought to end with the policy.

Although the CBN has provided $200million to commercial banks to dissipate the effects of the pressure on the banks, there are concerns that the daily demands of SMEs, operators in the shipping sector and oil marketers can’t be subjected to the banking process and the delays.

These challenges may also revive the practice of hard currency smuggling from neighbouring countries where there is less cumbersome procedures to access forex, some trade experts have warned.

As at Friday last week, three days after CBN’s announcement the unofficial dollar rate had increased by N20 to N525/$ from N505/$ on Wednesday.

Speaking with MMS Plus newspaper, the Managing Director of Cowry Assets Management Limited, Mr. Johnson Chukwu posited that the initial reaction of CBN’s new policy will be a steep devaluation of the naira.

He advised CBN to find avenues to meet the demand of legitimate customers who were patronizing the BDCs, noting that the value the BDCs had was simplicity and efficiency but CBN’s move to sell through the banks may not have the same level of efficiency and speed.

“Traders and legitimate fund users will be hard pressed to get dollar from the banks. As it stands today, CBN is already struggling to meet the forex demands from the commercial banks. Banks have also been struggling to get the forex to meet their customers’ demands. This move by CBN would put more pressure on the banks and because supply is shorter than the demand, closing the channels of forex distribution would lead to a situation where the prices will move up at a very fast rate. Consequently, that could lead to depreciation of the naira,” he said.

The finance expert pointed out some speedy requirements of forex which shouldn’t be subjected to rigorous banking procedures and longevity, such as shipping charges, oil affreightment, SME import businesses, among others.

“Under the Cabotage trade, ship chattering, Nigerian Ports Authority (NPA) charges, Nigerian Maritime Administration and Safety Agency (NIMASA) charges are paid in dollars. This means that for people involved in shipping, CBN has to create a window for them to quickly access funding apart from the window already available from the banks. If that fails and vessels arrive Nigeria and they are time-bound, these business persons will be forced to buy the dollar at any rate.”

“For instance, to take a product of 15,000 mt from Lagos to Calabar will be about $26,000 per day amounting to $260,000 for a period of ten days. It will be difficult to walk into a bank and demand $260,000 to quickly pay shipping charges. The banks will ask such customer to open Form A and bid for it. The bank wouldn’t be able to certify that bid in less than six months. The vessel would hold your product for that period and your demurrage charges will be $26,000 daily for the delay. Under such circumstances, any business person would be willing to buy dollar at any rate, even if it is N1000 per dollar,” he said.

While he noted that an alternative may be that the federal government legislates that all Cabotage charges be made in naira, this could force foreign vessel owners to withdraw their ships because their crew, liabilities and maintenance costs are in dollars.

“Indigenous ship owners don’t have enough vessels to meet the nation’s demand and these operators will also be affected because the cost of maintaining their vessels is in dollars. CBN has to consider that these transactions are time-bound because such forex needs are almost instantaneous and eliminating the BDCs means that CBN has to start opening windows for such transactions,” he stressed.

On the issue of roundtripping which became a fiscal menace with BDCs, Johnson Chukwu stated that despite commercial banks better control mechanisms and demand for requisite certifications, a sustained pressure on the banks could lead to compromise and sharp practices at the banks.

“As long as there is a high demand for something, you can’t fix a price because people will go for it at any cost. It’s not like the banking halls are operated by saints. My opinion is that CBN finds a way to reform the BDC system to make them more efficient and have independent people who have the structures to run such business. I was a banker when the official rate was N22/$ and the unofficial rate was  over N70/$. Banks would collect N22/$ from the CBN and sell to customers under the table for something closer to the rate at the parallel market. We need to avoid that kind of scenario coming back to the banking system,” he added.

When contacted, the Chairman of Rivers and Bayelsa Shippers’ Association, Mr. Ofon Udofia stressed that shippers require forex for their imports and as such will be victims of the pending forex hike and possible scarcity.

Udofia, however, warned that Nigerians will eventually feel the brunt of additional costs incurred by shippers because the imported goods and services would be sold at a price that guarantees profit for the shippers.

He urged the CBN to swiftly deepen efforts to promote exports as an avenue to enhance foreign exchange and dissipate the pressure from huge demand for forex in the country.

Speaking from the standpoint of a ship owner, the Managing Director of Oceanic Energy , Capt. Taiwo Akinpelumi argued that indigenous ship owners and the entire shipping sector should support the federal government’s efforts to strengthen the naira by collecting charges for coastal services in naira.

“The idea behind this ban is in the best interest of the nation. It’s only in Nigeria that you find the government sharing forex to the BDC operators. BDCs ought to be the interface between banks and tourists or travellers that come into the country or people that need little money for their transactions. I don’t think it should affect ship owners so much if the policy is critically implemented,” Akinpelumi said.

He stressed that Nigerians and organizations in the country should be promoting the naira ahead of any other currency.

“Why shouldn’t Cabotage services in Nigeria be paid for in naira? Why shouldn’t ship repair yards and crew in Nigeria be paid in naira? Most shipping companies in the country also have a local account, so why shouldn’t they receive payment in naira? I travelled to Ghana sometime and attempted to pay for a hotel in dollars but the manager declined stating that I had to change the currency to cedis first. This type of policies can also work on Nigeria to reduce the pressure on the dollar,” he queried.

Meanwhile, the Association of Bureaux De Change Operators of Nigeria (ABCON) has assured members of the public that Bureau De Change operators are still providing foreign exchange services.

ABCON said while the dollar sale from the CBN had helped in enhancing supply, the fact remained that BDCs were empowered to source forex from other sources and also to provide various services to members of the public.

The President, ABCON, Aminu Gwadabe, said this in a statement on Thursday last week, adding that the recent pronouncement of the CBN did not stop BDCs from providing forex services as allowed by their operating licences.

He said the association would engage with the CBN to address and resolve all the issues that led to the stoppage of foreign exchange sales to BDC operators.

“BDCs are licensed to provide retail FX services, including buying from the public and also selling to end-users for allowable transactions, namely personal travel allowance, business travel allowance, payment of medical and school fees,” Gwadabe said.

Manufacturers have also lamented that their fate is now hanging in the balance accessing forex from commercial banks following the CBN decision to stop forex supply to BDC operators.

A top executive at the Manufacturers Association of Nigeria (MAN) who preferred anonymity predicted more woes for the real sector of the economy, as the move would further accelerate hoarding and more end users, exporters and importers would also experience stifling forex allocation from commercial banks, leading to  more  forex squeeze in the country.

He, however, emphasized the need for the apex bank to properly monitor and supervise the commercial banks for prompt release of forex to operators and the business community in a bid to curb hoarding.

On his part, the President of Africa Association of Professional Freight Forwarders and Logistics of Nigeria (APFFLON), Mr. Frank Ogunojemite admonsihed the CBN to focus on addressing the ever depreciating value of naira.

“If you look at the current exchange rate of the dollar to naira in the black market, it’s about N520 to N525. If CBN suspects that the BDCs are hoarding the dollar, the agency should tackle the matter headlong. They should withdraw the licenses of the BDCs found culpable and sanitize the system,” he said.

With this development, he noted that people will require more naira to get a dollar compared to before.

“If you look at the exchange rate in the past one year, it’s very alarming and the situation is not palatable. In the long run, this is going to cause inflation. Look at the per capital income of Nigerians at the moment, it’s fixed, so, how would people be able to afford the basic things that are mostly imported using forex?” Ogunojemite queried.

According to him, the government needs to first take control of the depreciating naira amid several business loans that will become more challenging for investors in the country.

“I travelled recently and when I travelled a dollar was about N480 and now it is over N520 within 2 weeks, that means you’ll require more naira to get a dollar. It also means that the amount you spend in bringing in a consignment will increase, yet Nigerians are expected to afford such things with the salaries and per capita income that remains fixed,” the APFFLON boss lamented.

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