Finance experts have warned that the Central Bank of Nigeria’s (CBN) recent discontinuation of forex sale to Bureau de Change (BDC) operators in the country could have a negative impact on inflation unless the CBN pays keen attention to the implementation of its forex policy by the deposit money banks.
The CBN BDC forex ban has been a topic of discussion among finance experts, with its impact on inflation being of particular interest. As the festive season approaches with its attendant spike in buying and selling particularly of goods from abroad, analysts wonder if the CBN policy would achieve the desired effects and if forex would indeed be available, sufficient and accessible to those who need it for business purposes.
The naira has had an eventful run since the CBN forex ban to BDCs with the rate reaching as high as N525 to a dollar at the parallel market before appreciating back to N510 to a dollar on Monday, 9th August 2021.
Although the CBN and Nigerian Banks have reassured Nigerians that there is enough FX and thus, no cause for alarm, this optimism from the financial institutions has been met with scepticism as reports revealed the cumbersome documentation demanded by banks before the disbursement of FX to those who need it; with many bank customers reverting to BDC operators at the black market for their FX needs. Worse off, are entrepreneurs who need FX to finance the importation of items on the CBN’s 44 banned items list.
Speaking to Nairametrics on FX accessibility, a car importer in Lagos said, “I am willing to pay anything but the problem is that there isn’t enough dollar.”
Nairametrics, thus, sought to hear what experts had to say on the impact that the discontinuation of FX sale to BDCs could have on an already high inflation rate.
Victor Aluyi, Vice President/Head, Asset management at Comercio Partners stated that inflation would move in the same direction as the exchange rate, with an increase as the first reaction before finally falling. However, the effect on inflation may be so small that it would be unnoticeable.
Victor also believes that the CBN’s ban is unsustainable based on the results of the previous ban placed by the CBN of forex sale to BDCs.
“I expect that once the naira regains stability, we would move back to business as usual,” he opined.
Dr Omobola Adu, Research Analyst at GDL Nigeria postulated that the effect on inflation should be minimal if the policy is implemented properly.
“Concerning inflation, we shouldn’t expect any huge impact. This will largely be driven by the system working and people still getting access to FX from the banks.
“On the flip side, if people still go to BDCs, then that’s where the challenge will be because their rates would be higher which would then drive inflation up due to imported inflation, inflation in the US, for example, has been edging up, coupled with the exchange rate.”
When asked about the suitability of the CBN ban he said, “In 2016 or so, this was the same move the CBN made, but in the end, it was reversed.
“So based on track records you might say it might not be sustainable. However, I think it’s a good move to stop people from making an abnormal profit on the exchange rate and also the banks are more accountable to the CBN, so there should be a good level of control.
“To solve our FX crisis, we need to address the imbalance between supply and demand. One way is by working towards achieving diversification of our export by-product and pricing denomination.
“The more Naira priced products we can export, the stronger our currency will be.”
Dumebi Udegbunam, Fixed Income trader at UBA, suggested that inflation would be affected negatively by the CBN policy due to the large size of the informal sector.
“The informal sector, a major contributor to both GDP and employment, may find it difficult adjusting to the bank’s documentation process, especially for those under the bracket of the CBN’s 44 banned items.
“This difficulty in accessing FX may lead to a depreciation of the naira and a surge in prices as market participants move to the black market.”
He also said that Eurobonds are expected to increase the foreign exchange supply to Nigeria but the cost may be too pricey because of our current debt profile.
“We need to be less import-dependent and increase export, this would be the only suitable solution for a long-term fix.
“Also, the ease of doing business is key especially in increasing productivity,” he advised.
Dr Ifeoluwa Ogunrinola, lecturer at Covenant University opined that the effect of the CBN ban is highly dependent on how the CBN handles the policy implementation.
“If CBN manages the situation well by weighing its policy might on banks to ensure FX is readily available and assessable without discrimination or rationing of any sort, and at the agreed or market going rate, then, only short-term effects may suffice.
“In the short term, FX may become artificially scarce primarily due to political sabotage by BDC lords and others with a vested interest in the FX market. Over time, the effects should be moderated as public fears are allayed through compliance with the CBN directive.
“However, if CBN loses track of its policy powers over the banks, then, extreme scarcity will be experienced, as BDC operators will seek alternative sources of their FX and sell at cutthroat rates.
“This will automatically drum up domestic prices as FX scarcity and naira depreciation will erode the purchasing power of the naira.”
Dr Ogunrinola also stated that increasing the FX revenue base by diversifying the economy and prioritizing refined petroleum exports and liquefied natural gas exports is key to resolving the problem of foreign exchange scarcity.
Wale Okunrinboye, CFA, Investment Analyst at Sigma Pensions, stated that he expects inflation to drop further as Nigeria would soon enjoy more foreign exchange supply in the coming months.
“I anticipate the naira to appreciate as the CBN ban is commendable. Nowhere in the world does the central bank sell foreign exchange to BDCs,” Okunrinboye said.
The consensus puts the effectiveness of the CBN’s policy implementation in the spotlight, as a drift might lead to high inflation in the Nigerian economy.
Although steps have been taken to meet the needs of Nigerians, more actions may be needed to satisfy the country’s demand for foreign exchange especially during the surge in demand in the coming festive season.