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28.02.2024 Featured Analyst: How CBN’s Proposed $20,000 Sales to BDCs Can Mess Naira Up

Published 28th Feb, 2024

By Opeyemi Lawal

On Tuesday, the Central Bank of Nigeria (CBN) announced that it would begin the sale of foreign currencies to licensed bureaus de change (BDCs).

Hassan Mahmud, the CBN director of trade and exchange department, stated that the sum of $20,000 would be sold to each BDC and that the new policy was to meet the increasing demand for the dollar for invisible transactions.

Mahmud also said that this amount would be sold to the eligible BDCs at the rate of N1,301/$, which they in turn must sell at not more than one percent profit.

“To this end, the CBN has approved the sale of foreign exchange to eligible BDCs to meet the demand for invisible transactions,” the statement read in part.

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“The sum of $20,000 is to be sold to each BDC at the rate of N1,301/$- (representing the lower band rate of executed spot transactions at the Nigerian Autonomous Foreign Exchange Market (NAFEM) for the previous trading day, as of today, 27th February 2024).

“All BDCs are allowed to sell to end users at a margin not more than one per cent (1%) above the purchase rate from CBN.”

FIJ spoke with Mikael Bernard, a crypto and financial market analyst, and he stated that the new policy could further fuel dollar scarcity by creating an arbitrage opportunity of up to 23 percent profit for BDCs, who have the liberty to sell to anyone they want.

“The new CBN policy isn’t realistic because the BDC operators can choose to sell to anyone, and any of these people can go to the black market to sell anywhere between $1,600/$1 – $2,000/$1,” he said.

“At this rate, it’s at least 23 percent profit. This means that for every $20,000 purchase, the profit is up to N6 million, and this is weekly.

“This could cause the spread to widen as the black market operators might want to keep increasing rates to make profit. They might stop sourcing dollars on the streets and focus solely on the FX from CBN, as the margins are wide and sweet.”

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The financial analyst stated further that this could further weaken the naira and cause lots of stress on the CBN treasury.

“This widened gap could lead to further scarcity of the dollar and weaken the naira. This is because as the naira crashes, the profit margins of the BDCs and black market operators continue to increase, and soon they’ll be making 100 percent profit per transaction,” said Bernard.

“What happens with this is that the CBN soon runs out of FX to defend the naira, and by this time, the naira may have been trading at N3000/$1.”

Bernard said that one way this challenge could be tackled was by encouraging the Ministry of Finance to focus on tackling inflation and financing production.

“The CBN should leave BDCs alone. Create a balance between over-regulating FX and not giving them free FX,” he said.

“The Ministry of Finance should also focus on combating inflation and financing production, while the CBN stops the printing of the naira.”

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Published 28th Feb, 2024

By Opeyemi Lawal

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