BDCs blame lack of anchor price, disorganized market for naira to dollar exchange rate crash

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It was the first day of the week and Abu was on the 3rd mainland when a customer called him asking for the exchange rate between the naira and dollar. He informed the customer that it was N630 to the US dollar.

By the time he descended from the bridge he called the customer back informing him that the price was now N640 to the dollar and offered no explanation why. The bemused buyer on the other line hung up and never called back.

Another, buyer Ken, purchased an inflow of $15,000 from his Aboki at N655/$1 out of his demand for $70,000. An hour later Aboki called telling him he now has an additional $30,000 cash but the rate was now N660/$1.

Ken had no choice but to purchase, instructing the Aboki to deposit them in his bank accounts.

That is how volatile the exchange rate has been in the last few days.

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Foreign exchange traders in Nigeria aka Bureau De Change are now complaining about the fragmented forex market that has created arbitrage that is making them lose massively due to volatile multiple exchange rates.

We are losing money

Traders who spoke to Nairametrics anonymously expressed frustration regarding the disparate and unreliable exchange rate being brandished across markets in the country.

  • According to them, the disparate rates create arbitrage risks making some operators lose millions of naira within hours of just closing a trade.
  • “Yesterday, I bought for N610 and sold it within hours N620 believing that I just made a clean N10 spread. To my shock, I now found out a few hours later that the rate is not going for N630/$1. So, if I had waited, I would have made N20 spread and not N10. But this is unsustainable”.

Several other operators have complained about the lack of reference point for determining forex prices in the open market, a factor they blamed on the lack of sale of dollars to the CBN.

  • “Before now, we received dollars from the central bank at an official price. We then mark up this price with a premium and sell. That way, it is often easy to know what the price is because we have a reference anchor price. But since the central bank stopped selling dollars to us, there is no other reference price as everyone just sources dollars from everywhere and price it as they wish.”

Nairametrics also spoke with the President of Association of Bureau De Change Operators (ABCON), Aminu Gwadebe, on why there are different rates in the foreign exchange market by the dealers. Gwadebe questioned some of the rates being quoted in the market said the rates are

  • ‘’Because the market is a disorganized market as well as the demand too. So what I am telling you is that uncertainty is the cause. It also depends on the market you are taking from. For instance you are buying from Abuja, Abuja is not as competitive as Lagos in terms of pricing. Most of the times they buy low and sell high.”
  • “You know environment too goes a long way to determine whatever activity is going on there, but we in Lagos, we buy high and sell high and over there (in Abuja) they buy low and sell high.”
  • ‘’The liquidity here (Lagos) is fine, the demand here is moderately business driven, because you have importers and so on. Also if you call in from Abuja, I will give you politician rate and their rates are higher.’’

Why are we in a dollar crisis?

According to data from the central bank, Nigeria earns forex from 6 major sources namely,

  1. Capital Importations – (FPI & FDI),
  2. Loans – Eurobonds, other multilateral loans, swaps,
  3. Diaspora remittances,
  4. Exports – oil and non-oil,
  5. Income from investments – dividends, interest and,
  6. Other autonomous sources – (e.g., domiciliary accounts, inflows, etc.).
  • Since the outbreak of Covid-19, inflows across all 6 channels have been dwindling forcing a shortage of forex available to the country. While we have shortages in inflow, demand for dollars (outflows) has increased especially as we approach the summer season.
  • There are also concerns around a likely worsening situation as companies looking to secure raw materials as we get into the deep end of the second half of the year.
  • Finally, a lack of a structured market means those who have forex sell at whatever prices they desire since there is no anchor price, platform, or exchange where prices are quoted. The only exchange available is the FMDQ but traders do not have confidence in the price.

What is the solution?

Nairametrics believes the solution to the crisis is the absence of an anchor price or a mechanism for determining forex prices on the black market. Since traders do not believe in the official NAFEX market, there is an absence of an alternative market that has the structure for effective price discovery.

  • Hence the solution might be for the BDC operators to create an exchange where their trades can be transparently captured, and price determined. This is how exchanges operate globally, especially for forex.
  • Some of the operators admit that this has been mooted severally in a WhatsApp group where BDC operators often chat, but the concern is that the central bank may not approve it.
  • Most analysts who speak to Nairametrics also insist, that the CBN will have to allow the Investor and Exporter (I&E) window function as originally designed. Rather than fix the price at the current N414-420/$1 the CBN will have to allow the rates to adjust upwards in line with the forces of demand and supply.
  • This will introduce confidence in the market and allow businesses with forex inflows to repatriate into the country rather than leave it in foreign accounts as is currently the case.

 

 

 

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