The Central Bank of Nigeria (CBN) recently accused bureaux de change (BDCs) of fomenting “gross inefficiencies and sharp practices (such as) growing incidence of rent-seeking, depletion of external reserves, financing of unauthorized transactions and dollarisation, among others”. The apex bank simultaneously announced new requirements for the operation of BDCs. It is charitable to state right away that the accusations amount to a diversionary attempt to shift blame because the listed undesirable economic results and practices arose directly from the BDC guidelines and monetary policies. Disappointingly, the new requirements, which did not address the causative factors, will at best bring about temporary scaling down of the observed malpractices.
What are the facts of the matter? Firstly, the CBN set out to “supervise and monitor the operations of BDCs to ensure the orderly conduct and development of this segment of the autonomous foreign exchange market.” It licensed BDCs to provide small-scale foreign exchange service. But the scope or limit of the small-scale operation was left undefined. Besides, according to the CBN guidelines dated June 15, 2001, “the foreign currencies dealt in by a BDC shall derive only from private sources.” However, the guidelines vaguely dated May 2002 modified that restriction to embrace “such other sources, including the interbank forex market (IFEM), as the CBN shall define from time to time.” The BDCs’ access to forex further escalated when the erstwhile London and Paris clubs of creditor nations not only collected US$12 billion for Nigeria’s external debt exit but also extracted an adjunct arrangement to be administered on their behalf by the
IMF/World Bank under a policy support instrument (PSI). Through the PSI, the Bretton Woods institutions okayed the wholesale Dutch auction system (WDAS) and BDCs as channels for disbursement of official forex beginning from February and April 2006 respectively as relevant CBN publications show. Today the CBN releases to BDCs over 10 per cent of shared Federation Account oil proceeds which the CBN withholds from the beneficiaries.
Hence, CBN policies actively aid BDCs to obtain huge forex amounts primarily in raw cash from private, IFEM and WDAS sources. In the circumstances, are BDCs truly small-scale dealers in forex as contained in the CBN guidelines? No. Do BDCs operate only in the autonomous forex market as the CBN set out to ensure? No. Does the fixing of a new minimum capital base alone as requirement for operating BDCs alter the above CBN breaches of the existing guidelines? No.
Secondly, BDCs are required to utilise forex obtained from IFEM for the purpose of paying out Business Travel Allowance and Personal Travel Allowance and also issuing ECOWAS Travellers Cheques. Very little documentation is required. But considering that private and business travellers invariably own bank accounts, it is circuitous and unnecessary for travellers to be asked to go through BDCs in order to purchase foreign currencies which had been obtained from banks in the first place. The banks are better placed and should be made to handle forex transactions concerning their customers’ foreign travels. And because only a small fraction of the huge amounts of forex that the CBN makes available to BDCs is required to meet the forex entitlements of travellers and the needs of small-scale forex end-users. BDCs dispose of the remaining forex largesse in tune with the guidelines on cash-and-carry basis and without any documentation. That is the gaping loophole that accommodates the insatiable demand for forex by all and sundry through the BDCs and actual (not potential as the CBN insincerely claims) financing of unauthorised transactions to the detriment of the economy.
Thirdly, contrary to CBN’s expectation, BDCs do not and should not “serve as tools for the management of exchange rate”. The charges of “widening margins and rent-seeking” leveled against BDCs also reveal the apex bank’s lack of rigour in this regard. Ordinarily, BDCs, as small-scale dealers in forex, are takers rather than setters of exchange rate. The CBN guidelines are flawed and leave room for BDCs to fix rent-yielding selling rates by failing to tie the allowable “maximum spread of two per cent between the buying and selling rates” to the ruling exchange rate which, but for the CBN’s decades-long bungling, should be the same as the properly managed float exchange rate.
Fourthly, the earlier noted WDAS or the retail Dutch auction system (RDAS) that returned in October 2013 is an exchange rate fixing method which is completely different from the officially mandated (by the medium term expenditure framework and the Federal Appropriation Act) managed float exchange rate regime. The use of WDAS, RDAS and BDCs merely intensified the monotonic depreciation and devaluation of the naira, which began in 1986. Consequently, the fall in the value of the naira has become predictable down the years. That development steadily eroded public confidence in the naira culminating in increasing dollarization. The uncontrolled huge amounts of forex acquired by BDDs, no thanks to CBN policies, further accelerated dollarisation. By contrast, the managed float exchange rate system, when properly implemented, promotes currency stability, manifests a tendency towards currency appreciation and ensures constant accretion to external reserves
which are investable. The managed float system is the antidote to dollarisation, not to mention its other wholesome economic benefits.
In the light of these facts, does full blame for the rampaging malpractices being perpetrated by BDCs not rest on the CBN alone? It is therefore imperative for the apex bank to make the BDCs to serve their true purpose by promptly updating the BDC operational guidelines and removing all the flaws therein. The deficiencies highlighted above are not exhaustive. Definitely, access by BDCs to foreign exchange through IFEM and RDAS (or WDAS) is inappropriate and should be discontinued. In fact, there should be flow of forex in the opposite direction by ensuring that BDCs sell to banks any generated surplus forex above a specified amount as a result of buying of forex offered by small holders and selling forex to small-scale end-users.
All in all, an end to CBN’s persistent bungling of its statutory responsibilities, which appears increasingly to be intentional, is long overdue.
