CBN Approves New Exchange Rate for BDCs to Crash Dollar Price.

 

In a bid to address the persistent depreciation of the Naira in foreign exchange markets, the Central Bank of Nigeria (CBN) has launched a fresh strategy by announcing a new round of Dollar sales to licensed Bureau De Change (BDC) operators. This recent move is part of a broader effort to stabilize the naira and curb its continued fall against the dollar.

The CBN, in a circular issued on Wednesday, September 25, 2024, disclosed that it will sell $20,000 in foreign exchange to eligible BDC operators across the country. This measure comes with specific guidelines for reselling dollars to Nigerians and is intended to meet retail market demand for eligible invisible transactions such as personal travel allowances (PTA), business travel allowances (BTA), school fees, and medical bills.

Read also: UNGA79 is Trending: Despite Wasting Debt Forgiveness in Obasanjo Era, Nigeria Seeks Relief Again

New Exchange Rate for BDCs: A Strategic Adjustment

According to the statement signed by Dr. W. J. Kanya, the Acting Director of the CBN's Trade and Exchange Department, the licensed BDC operators will be able to purchase the dollars at a significantly lower rate of ₦1,590/$. This rate is ₦77.42 cheaper than the official exchange rate, which stood at ₦1,667.42/$ on the same day. By offering dollars at a lower rate, the CBN aims to create a buffer against inflation and reduce the pressure on the naira.

This discount is expected to ease access to foreign currency for individuals and businesses involved in non-commercial transactions. However, the CBN has put stringent controls in place, mandating that these BDC operators resell the dollars to eligible Nigerians at regulated rates, thereby preventing unnecessary profiteering and speculation in the market.

The Implications of Dollar Sales to BDCs

The CBN’s decision to sell foreign exchange to BDCs is a strategic attempt to regulate the supply of dollars in the Nigerian economy. With the rise of parallel market operations and black-market trading of foreign currencies, the official exchange rates have consistently come under strain, often failing to meet the growing demand for dollars.

By reintroducing dollar sales to BDC operators, the CBN aims to:

1. Increase Dollar liquidity in the market, thereby reducing the widening gap between the official and parallel market rates.
2. Curb illegal forex trading by ensuring that licensed operators, rather than black-market dealers, have access to foreign currency.
3. Strengthen the Naira against further depreciation by ensuring adequate and affordable access to foreign exchange for eligible transactions, particularly those that involve international travel, education, and healthcare.

Moreover, this move provides a controlled alternative to Nigeria's foreign exchange conundrum, where the BDCs serve as intermediaries between the formal banking sector and retail customers. The idea is to regulate foreign exchange by balancing availability while maintaining the naira’s value in both the official and parallel markets.

Addressing Naira Depreciation: Will This Work?

Nigeria has been grappling with the depreciation of the naira due to a combination of economic challenges, including dwindling foreign reserves, reduced oil revenues, and excessive demand for dollars for imports. The naira’s depreciation has led to inflation and a significant increase in the cost of living for ordinary Nigerians.

By selling dollars to BDCs at a reduced rate, the CBN is attempting to tackle this issue head-on. In theory, the increased availability of dollars should help:

• Reduce speculation in the foreign exchange market.
• Stabilize the exchange rate by increasing the supply of dollars.
• Ease pressure on the parallel market, where the dollar typically sells at much higher rates.

However, the real question remains whether this measure will provide lasting relief or if it’s just a short-term fix to the deep-rooted structural problems in Nigeria’s forex market.

The Role of BDCs in Nigeria’s Forex Market

BDC operators play a critical role in Nigeria’s foreign exchange ecosystem by serving as the primary providers of forex for individuals and small businesses who may find it challenging to access dollars through commercial banks. However, their activities have often come under scrutiny due to their involvement in speculative practices that drive up the price of the dollar in the black market.

By offering a regulated flow of forex to BDCs, the CBN hopes to re-establish some level of stability in the currency market. With access to cheaper dollars, these operators are expected to fulfill their original role as reliable intermediaries for retail customers, keeping prices in check and discouraging speculation.

Government and Regulatory Oversight

While the CBN’s plan to sell $20,000 to each licensed BDC appears promising, much will depend on regulatory oversight and the enforcement of its guidelines. The BDC sector has, in the past, been prone to irregularities, with some operators abusing their positions to hoard dollars and manipulate prices for personal gain.

To mitigate this risk, the CBN must work closely with anti-corruption agencies and financial regulators to ensure compliance. Any operators found engaging in price gouging, hoarding, or illegal resale of foreign exchange must be held accountable to prevent the strategy from backfiring.

Additionally, the Nigerian public should be made aware of the official resale rates set by the CBN so that they can avoid being exploited by unscrupulous operators. Ensuring transparency in the BDC operations will be crucial in regaining public trust and stabilizing the market.

The CBN’s decision to crash the dollar price and provide BDC operators with cheaper access to foreign exchange is a bold and necessary move in addressing the ongoing depreciation of the naira. While it presents a potential avenue for stabilizing Nigeria’s foreign exchange market, the success of this strategy will hinge on proper implementation, monitoring, and ensuring that BDCs adhere to the regulated resale rates.

If this approach works, it could provide much-needed relief to Nigerians who rely on foreign exchange for travel, education, and healthcare, while also easing inflationary pressures. However, for a lasting solution, the government must also focus on boosting foreign reserves, diversifying the economy, and curbing speculative activities in the forex market.