With the naira falling to an all-time low of N1,900/1$ on the parallel market in February this year, the Central Bank of Nigeria (CBN), as part of the slew of measures it was then churning out to ensure exchange rate stability, resumed its sale of foreign exchange to Bureau De Change (BDC) operators, which it had discontinued on July 27, 2021, citing unethical practices by the BDCs.

FX sales to BDCs

The resumption of forex sales to the money changers, which came in the wake of the apex bank’s revocation of licenses of over 4173 BDC operators in February, saw it selling $20,000 to each eligible BDC at the rate of N1,301/$ and directing the operators to sell to end-users at a margin “not more than one percent above the purchase rate from CBN.”

On March 26, the CBN sold $10,000 to each eligible BDC at a rate of N1,251/$1, but this time, it directed them to sell the dollars to eligible customers at a rate not exceeding 1.5 per cent above the purchase price.

There were two FX sales to the BDCs in April with the apex bank first offering $10,000 to each BDC at a rate of N1,101/$1 and another $10,000 at N1,021/$1.

Analysts believe that the forex sales to BDCs was key to the naira recovering from an all-time low of N1,900/1$ on the parallel market in February this year, to about N1,100/$1 in April.

Naira rebound

Indeed, on April 11, Bloomberg reported Goldman Sachs, which had earlier boldly forecast in early March that the naira would rebound to N1,200 per dollar between Q2’24 and Q2’25, as predicting that the naira could strengthen further to below N1,000 to the dollar as a result of the effectiveness of the CBN’s forex measures.

Clearly, the naira’s rebound was the main reason, part of the programs at the International Monetary Fund (IMF) and World Bank annual meetings held in Washington in April this year, focused on Nigeria’s FX market reforms. Speaking at the event, CBN Governor, Mr. Olayemi Cardoso, rejected the view in some quarters that the apex bank depleted its dollar buffers to defend the naira.

He stressed that defending the naira would be contrary to the CBN’s forex liberalisation policy that aims to ensure that market forces determine the value of the naira.

He said: “What we’re encouraging for the markets is willing buyer, willing seller, price discovery and ultimately, I perceive a future where the central bank will really not need to intervene, except in very, very unusual circumstances.

“What is important to us is that there’s sufficient liquidity in the market which I’ve spoken about here today… and that will continue.

So, as long as we have a vibrant currency market, why do we need to go in there to intervene? We don’t need to.”

He further stated: “I can understand that, especially at the outset, there have been little cases, where the BDCs… there was a need to get that segment going.

And small amounts of money, relatively tiny amounts of money, have gone into that to catalyse that happening because it’s important that individuals have access to funds to send their kids abroad and do things which are important — health, etc.

“So, it’s important not to keep them out of the mainstay. But in terms of intervention, frankly that’s really not our intention at all.”

Further decline

Interestingly, there are indications that the naira started weakening again in the forex markets in May- falling to N1,600/$1 on the parallel market- because the apex bank appeared to suspend its forex sales to the BDCs.

Commenting on volatility in the foreign exchange market at the post Monetary Policy Committee (MPC) meeting press conference in May, Cardoso attributed it to “seasonal demands.”

He said: “(MPC) members further observed the recent volatility in the foreign exchange market attributing this to seasonal demand, a reflection of the interplay between demand and supply in a freely, functioning market system.”

He, however, stated that “there is light at the end of the tunnel,” adding that “the tools that the CBN is using is working” and “we are beginning to get some

Financial analysts were confident that the regulator had the capacity to increase its interventions in the forex market to support the local currency

reliefs.” Despite the CBN’s governor’s optimism, naira weakness persisted on both the official and parallel foreign exchange markets in June and early this month.

Still, with the country’s external reserves rising to a one-year high of $35.05 billion as of July 8, 2024, financial analysts were confident that the regulator had the capacity to increase its interventions in the forex market to support the local currency.

Increased interventions

Penultimate Friday, the CBN did issue a statement, announcing that it had sold the sum of $122,671,000.00 to 46 authorised dealers.

The statement, which was signed by the CBN’s Director in charge of Financial Markets, Dr. Omolara Duke, disclosed that of the total sale, $67,500,000.00 was sold to 27 authorised dealers, while the sum of $2.5 million was bought from one authorised dealer on July 10, 2024.

According to the statement, the range of the bid for the July 10, 2024 sales was N1,480.0/$1- N1,500.0/$1, while the value date for the payments, going by the settlement cycle of two days (T+2), is July 12, 2024.

The statement further said that on July 11, 2024, the regulator sold the sum of $55,171, 000 to 19 authorised dealers at N1,540.0/$1, and that no FX was purchased.

While reiterating that the apex bank supplies foreign exchange to the Foreign Exchange (FX) market to improve liquidity through FX spot sales to authorised dealers using two-way quotes, the statement stressed that the apex bank will continue to ensure stability in the FX market.

But more significantly, after appearing to have again suspended forex sales to BDCs (its last allocation to the operators was in April), the CBN, last Thursday, issued a circular, in which it announced that it had approved the sale of the sum of $20,000 to each eligible BDC at the rate of N1,450/$1.

It said that the rate represents the lower band of the trading rate at the Nigerian Autonomous Foreign Exchange Market (NAFEM) in the previous trading day.

According to the circular, the latest forex sale to the BDCs is in response to “continued distortions in the retail end of the market, which is feeding into the parallel market” and further widening the exchange rate premium.

The circular also said that BDCs are allowed to sell to eligible end-users at a margin, not more than 1.5 per cent, above the purchase rate from CBN. The circular read:

“Following the on-going reforms in the foreign exchange market, with the objective of achieving an appropriate market determined exchange rate for the naira, the Central Bank of Nigeria (CBN) has observed the continued distortions in the retail end of the market, which is feeding into the Parallel market and further widen the exchange rate premium.

“To this end, the CBN has approved the sales of FX to eligible Bureau De Change (BDCs) to meet the demand for invisible transactions.

The sum of $20,000 is to be sold to each BDC at the rate of N1,450/$ (representing the lower band of the trading rate at NAFEM in the previous trading day).

“All BDCs are allowed to sell to eligible end-users at a margin not more than one point five percent (1.5%) above the purchase rate from CBN.

“All eligible BDCs are directed to make the naira payment to the listed CBN naira Deposit Account Numbers and submit confirmation of payment with other necessary documentation for disbursement at the appropriate CBN Branches – (Abuja, Awka, Kano, and Lagos).”

Last Friday, the CBN announced that had injected additional liquidity into the forex market with its sale of a total Sum of $106.5 million forex to 29 authorised dealer banks between Thursday, July 18 and Friday, July 19, 2024.

According to a circular issued by the apex bank, the amounts were sold at an exchange rate range of NI,498.00/$1 to NI,530.00/$1.

In addition, the statement said the CBN bought $9000,500 from four authorized dealer banks at rates between NI,510.00/$1 and NI,550.00/$1.

The CBN, in the statement, commented on the recent volatility in the foreign exchange market, stating that this was driven largely by demand pressure from corporate entities and the expected seasonal uptick during the summer period.

It assured the public that it had commenced regular sale of foreign exchange through Authorised Dealer Banks and licensed BDCs to improve supply in the foreign exchange market in line with its price stability mandate and its commitment to ensure a well-functioning and liquid market.

“Over the next few weeks, the CBN will continue to support various segments of the official markets with liquidity,” the statement said.

Conclusion

However, the consensus among analysts is that the CBN’s capacity to stabilise the exchange rate will depend on the volume of demand for forex. According to them, the apex bank may struggle to cope with a very high demand.