By Omoh Gabriel
The pressure on the Naira at the foreign exchange market might continue to mount and see further depreciation in value of the Naira if the activities of currency speculators are not curbed. At the centre of this speculative activities are the Bureau de Change. Right from the deregulation of the foreign exchange market, the operation of third party non bank outlet for foreign exchange transaction has been the bane of the Naira. Those who own and operate these outlets do so for personal gains. in the guise of helping to reach the unreached members of the public by banks. They buy foreign exchange at cheap rate from CBN and divert them to the parallel market and sell at exorbitant rate to end users.
For instance they buy dollars from CBN at N199 and sell same at N240 per dollar thus making a premium of about N41 per dollar. As of today, the economy is being starved of forex but operators of BDC are smiling to their banks.
They have long become centres of round tripping and worse for it the CBN is ill equipped to monitor them. A curious look at these BDCs showed that there are over 10, 000 of them across the country mostly owned by highly influential Nigerians.
They simply buy foreign exchange from the CBN for themselves. Last week, an operator told a story to a banker, how highly placed Nigerians are buying forex through BDCs and taking same across the Nigerian borders in this period of relatively scarce foreign exchange.
According to him, many of these Nigerians have huge forex stacked in their homes while the nation suffers. Those who are not keeping them at home are sending them out through neighbouring countries. If speculators are taken out of the market, the real forex need of Nigerians will drop considerably.
Banks have long been known as financial intermediaries. Individuals and corporate bodies direct their financial needs to banks. Through the banks there is usually appropriate documentation. Nigerians that are avoiding official channels complain of the rigour of documentation and seek refuge in BDCs. If banks can cater for Basic Travelling Allowance of $1000-5000 dollars of Nigerians, why should any true businessman not want to source his foreign exchange from the bank?
It is simply for dubious reasons. The continued depreciation of the Naira is due to scarcity of foreign exchange in the market but there is huge amount of forex in the hands of currency speculators. Banks are finding it increasingly difficult to sell foreign exchange to those with genuine needs. Last week, a parent said that since early December last year he applied for just £1,500 for student maintenance but as at January 8th the bank has not been able to sell the required fund to him.
The same man was able to source the amount through Bureau de Change at a cut throat price. The question being asked is why should BDC co-exist with banks? Why can banks not sell foreign exchange to every Nigerian that needs it? The issue lies with the ownership of these bureau de change. They exist because policy makers are the owners who use them to make money for themselves through round tripping. The greed of these BDC owners is the source of the continued depreciation of the Naira.
The mistake made by the monetary authorities since the deregulation of the economy in 1986 is allowing about three official markets to exist in foreign exchange transactions. This mistake has lingered and the CBN has not been able to muster the courage to correct the anomaly, the reason being that some key staff of the CBN own and operate some of these BDCs.
At the inception of the famous deregulation of the foreign exchange market, the CBN introduced three tier markets for the same commodity, (foreign exchange). There was the first tier market which was the official rate at which the government bought foreign exchange from the CBN. There was the Second tier market where the private sector and other individuals were sourcing their foreign exchange requirement from.
The third was the autonomous foreign exchange market where exporters put the proceeds of their exports and sell same at their own determined rate. However, there existed and still exists a parallel market where un-licensed individuals and lately Bureau de Change hawk foreign exchange along major streets in Nigeria and in mosques.
The rates that ruled these markets were never the same. In fact, there have been multiple exchange rates in the economy since the deregulation. This gave room for foreign exchange speculations that resulted in excess demand for foreign exchange. Nigerians, banks and others have been hedging against depreciation ever since. As of today, the demand is high because those who have the resources are buying dollars for keeps in anticipation of further devaluation of the Naira as a result of declining oil prices.
In economics, there is what is regarded as shadow price of a product. The shadow price usually is the price that is envisaged if the product were allowed to find its true value in a free market setting. As a result of the shadow price of the Naira, resulting from these other markets, foreign investors have always used the price differential to agitate that the currency was overvalued and that the true exchange rate of the Naira is the parallel market rate.
Nigerian government functionaries in the bid to satisfy these investors always panicked and continued to adjust the currency. From the N1.5 to the dollar in 1986 the Naira exchange rate has moved to N199 at the official market while it is going for N240 at the parallel market. In late 1987, the exchange rate was N4.02 to the dollar and by 1988, it had moved along the parallel market rate of N4.54. The economy was still on its knees as the exchange rate moved further in 1989 to N7.39 and in 1993, the two markets were merged at N22.05 to the dollar.
By the turn of the century in 2000, the exchange rate was N102.10 to the dollar. By 2002, the exchange rate of the Naira to the dollar was N121 and in 2014, the rate had peaked at N240. Those arguing that the Naira is over valued do so by referencing the parallel market rate as the correct market value of the Naira. The International Monetary Fund, World Bank Group have all use this argument to convince the Nigerian authorities to continue the onslaught on the Naira.
The official handling of the exchange rate has been questionable. Why will there be two exchange rates in an economy? Why must there be an inter-bank exchange rate and a parallel market rate? Is the Nigerian economy different from others? Must the so called Nigerian factor come to play in every facet of the nation? What makes it so difficult for the foreign exchange market to maintain a single rate? Those who trade in currency in Nigerian major cities are they not Economic saboteurs? Are the operatives of the Economic and Financial Crime not seeing them? Are they simply untouchables? Put an end to the parallel market and the Naira will stabilise.