11 December 2017

Nigeria: 'Our Roles in Exchange Rate Stability Is No More in Doubt'

interview

Albanians Aminu Gwadabe is the President of Association of Bureau De Change Operators of Nigeria. He has remained outspoken and passionate about the role of his members in bringing exchange rate to convergence. In this interview with journalists, he attributes the converging rates to BDCs' compliance with rules of the current reforms.

Given the near convergence in rates, do you still see the need for continued dollar sales to BDCs?

YOU see the sovereignty of any currency is the sovereignty of that nation. No nation will just fold its arm and allow others dictate the exchange rate of its currency. Every nation protects their currency. Now having said that, one of the determining factor of this currency stability is the buffer or the external reserve. And I want to congratulate the CBN, the buffers have been good, there is projection of $45 billion reserve by end of next year, so that will continue to generate positive outlook of the exchange rate. And I am happy that the CBN Governor, just last week said that the CBN has the ammunition to fight anybody that will joke with the exchange rate regime. So the sustainability of CBN intervention in ensuring continues growth, continuous stabilisation of the exchange rate is just too important.

Now, for the BDCs, for the past one year, we are not even relying on the CBN sources. Our sources have been diversified from the CBN sources to IMTO sources. So all that the CBN needs to do is to see, in conjunction with the association how we can deepen the market. It is all about deepening the forex market. We can come in with other products; we can come in with other sources. Even the Investors and Exporters (I&E) window, as far as I am concerned should be another window for the BDCs to be buying money. The CBN, like what they are doing right now, coordinating the IMTO proceeds, they should also begin to coordinate the proceeds of the (I&E) window so that we have enough of liquidity for the BDCs to ensure the stability is maintained.

Even the Diaspora remittances, you see the association is working on a lot of automation projects to enhance standards, to enhance competition, global competitiveness, in terms of our visibility even for the world to see that there is honesty and transparency in our system. So we are building confidence and we are working with the Nigeria Interbank Settlement System (NIBSS) to ensure that most of our operations, most of our systems are being transparent and very soon our members will start doing online real time rendition of their returns. We have perfected that with the CBN, we are only waiting for the tokens to be provided. So our members will not need to go to CBN branches to submit their returns, they will now be doing it from the comfort of their office.

So it is germane for CBN to continue to deepen the forex market, and statistics, experience has shown that the only reliable and efficient tool to achieving this convergence is the BDC subsector.

What roles did BDCs play in the achievement of forex stability?

A BDC is defined by the CBN manual as a retail foreign exchange dealer to carrying on the business of Personal Travel Allowance (PTA), Business Travel Allowance (BTA), medical and school fees, and also to carrying on inward and outward transfer. So, a BDC is a licensed outfit, normally by the CBN. All over the world you have BDC operators and they play different roles. For instance, the primary role of BDCs globally is to ensure forex availability to the critical retail sector of the forex market in terms of supply so as to bridge the gap between the official and the parallel market exchange rate; and two, they have even gone, for instance, beyond convergence, beyond providing liquidity, to the achievement of the major policy of the CBN, which is exchange rate stability.

Ab initio, before BDCs were allowed in the official foreign exchange market, the CBN over the years tried many methods to ensure there is convergence of the exchange rates, but that was not achieved. We have witnessed different auction system, Retail Dutch Auction, Wholesale Dutch Auction, all these did not deliver the desired result. But in 2006, when all the prescriptions of how to checkmate this problem of spikes (volability) in the forex market, the thought to allow BDCs come into the official market was considered, and they (CBN) allowed us. By then we had a gap of about N50 ranging to N60, but as soon as BDCs came into the official market, within one month, the rates converged to a difference of only 50 kobo between the parallel market and the official market.

So the BDCs have continued to play that role to the CBN and even to the government of Nigeria, to ensure that there is convergence of rates, elimination of spikes in the forex rates and that there is exchange rate stability.

Overtime, there have been arguments about the role of BDCs. Some even went to the extent of saying the BDCs are no longer relevant. If you remember the single exchange market that came in 2014, it did not even recognised the role of BDCs. However, that regime did not last because they did not consider the role of the BDCs. But after consistent agitation by the association, that there is need to acknowledge the role of the BDCs and include them, so that we can continue with what we have been helping the CBN and the economy to achieve, which is exchange rate stability, the CBN reviewed its stance by allowing us to come into the market, and also offered us what they call the International Money Transfer Operations (IMTO) proceeds, and since then there have been significant achievements. One, we have also disappointed the pundits that predicted that the dollar exchange rate will hit N1000 before December 2017.

Two, we have helped in eliminating the spike, volatility and uncertainty of exchange rate. Before people cannot plan, manufacturers were crying, but now the manufacturers are opting for the exchange rate above the inflation rate due to the stability been witnessed in the market. No more spike, people can plan, I think for the past six months, we have seen the dollar stable between N360 and N365 even at the parallel market. So this is a great achievement for the manufacturers, for economic planners. At least people can plan, people can order their inventory without much stress. That has been one of the important roles BDCs play, in eliminating the spike, and also the gap between the exchange rates, which created opportunities for rent seeking. There is no more rent seeking. Speculation which also used to be the other of the day in the forex market has also been eliminated. Also currency exportation, which is also an opportunity just because of the opportunities for rent seeking, is also not the order of the day.

All these are great achievements that the BDCs have helped in ensuring that the economy is stable, to the point that we have even come out of recession. For an economy to grow, there must be some sectors doing the hard job. I can assure you that for this convergence that we have seen, the commendation should go to the BDCs, because it is their hard work that made it happen.

Now, most of the BDCs because of the convergence, most of the BDCs are not even in operations because the parallel market rate is even lower than that of our rate, so we have brought down the rate. Even below the parallel market rate, with difference of about N1 to N1.50, so there are a lot of achievements.

Also, in the process BDCs created employment, we are about 3,500 licensed BDCs now and each BDC have at least nothing less than six staffs. So if you multiply six by 3,500, we are talking about 21,000 Nigerians that are dependent on the BDC subsector.

What is the position of operators in the agitation for increase margin and other challenges of operators?

Right now the BDCs are operating under what I call the challenges of multiple exchange rates. That has been a very key issue in terms of also continued transparency and stability of the forex market.

However I am also not unaware of the fact that the sovereignty of the currency is the sovereignty of that nation , so the CBN is having two or three different exchange rates to ensure liquidity, but you see that has been posing a challenge because you see even the bank rate, the CBN is selling to them at N358 per dollar and we are buying N360 per dollar from the CBN. So it is a very big challenge for our members to operate. So that has been something that is making the business very very unprofitable. It is very unprofitable, some members are not able to meet up with their overhead cost, salaries, you know I told you each BDC have about six staffs, and another challenge is the bank charges. What the banks are charging on BDC transactions is usually high, and these are some of the potent challenges we are facing.

The CBN should allow a level playing field and competitive rates among the various operators in the forex market. A situation where banks buy dollars from CBN at N358 per dollar and sell the same dollars to BDCs at N360 does not represents a level playing field or fair completion, given the fact that we operate in the same market segment.

But we have hope, from all indices and parameters, one of the trends or the way to go, you will see the CBN also coming to review their position on the exchange rate. I am sure we are all working now on inflation, once they can achieve single digit inflation, then they will begin also to ensure that the exchange rate is headed southward so as to ensure growth, output and more employment.

Because up till now, despite the fact that inflation has dropped to15.9 per cent, it is still higher than the MPC rate. Remember that the MPC rate is 14 per cent, and we are talking about inflation rate about 16 percent. The CBN Governor just stated it, in fact there is research that says no economy can spur growth, you cannot spur growth with inflation rate above 12 per cent. So automatically you see the challenge, why they cannot bring down the exchange rate now. But as soon as, by next year, with evaluations here and there, with a lot of revenue coming in, from increased oil prices, from recovery of assets, I am sure we will have a lot of buffer to ensure that the major sectors are working perfectly. More especially the manufacturing sector has to be turned around, and once the manufacturing sector is turned around, and they are investing a lot in electricity. At least we can see some improvement in the kind of light we have now compared to what we had before. So all these things put together, I am sure by next year, the outlook is great.

Is it possible not to have multiple exchange rates as we have it now?

It is very possible. When you look at determination of the exchange rate now, we have what we call managed float. And if you look at even where the exchange rate should go, if not the inflation rate that is higher than the MPC rate, am sure by now, the prediction of dollar should be N250 per dollar, it would have been feasible.

But you cannot control the currency of imports, the currency of imports is the dollar, and it is very difficult to control. So what we are doing now, diversification of exports and reduction in food imports will help a lot in removing multiplicity in the exchange rate and ensure more prosperity. It is very possible.

What is your outlook for the naira in 2018?

My outlook for the naira, ceteris paribus, I see the naira going to say, N300 to the dollar. The basis for my outlook is that, one, we are going to have a robust external reserve buffer, two, we are cutting our food import, and we are diversifying our export, and then corporate governance. You see that in all we are doing now, everybody is imbibing the rules of corporate governance, Know Your Customers (KYC), Anti money laundering manual and what have you, to ensure that no more breeches.

The Q3 GDP report shows that with the exception of the Oil and Gas, and agric sector, all other sectors contracted. This prompted some analysts to claim that the economy is still in recession. From the BDC industry perspective, what is your feel of economic activities this year and for next year too? Are you seeing contraction or expansion in economic activities at your level?

I think economics have already provided the answer to the issue of recession. We cannot come and start redefining what a recession is. Recession as defined by economists is two consecutive quarters of negative growth, and if there are statistics that indicates otherwise, that we had positive GDP growth then I also want to agree with that statistic. However I agree with you, it's like a single sector driven positive GDP growth, where it is only the oil and gas sector that is contributing most of the growth we are having. But I think it is not a bad analysis, it is also something that can keep us in our comfort zone, that yes we are doing well.

However in terms of the BDC subsector contribution, we have contributed billions of naira in turnovers. Because each BDC is doing a minimum of N15 million transactions per week, multiply that by 3,500 BDCs. So this is the turnover we contribute to the economy. In fact I don't think the oil sector has the kind of turnover we are having. And with our automation drive, we believe investors inflow, as a result of the confidence so far established on the stability of the exchange rate, will double or triple. And with the continued determination of the government to ensure peace, the Diaspora remittances, estimated at $35 billion, we also predict, will go up to $45 billion to $50 billion. So these are other sources that will empower the CBN with more ammunition to use the BDCs and ensure that the exchange rate continue to stabilise, and the rates continue to converge, and the spikes is no more in the market.

You said that the CBN should allow BDCs access dollars from the I&E window. How workable is this?

Yes, it is very workable. If you look at the IMTO window now, the proceeds come to the banks, which is been coordinated by the CBN, and it is disbursed to BDCs operators. So the same concept or procedure can be adapted in the I&E window. Because if you remember, it was even our advocacy that made the CBN consider, in telling them that the dwindling investors confidence in the market. Because we always meet with the investors and they always tell us their concerns and fears, and part of our recommendation to the CBN was to create a special window for investors and exporters. And you can see the impact, it is working very well. In fact what we are even looking at is that there should be a Diaspora window like the I&E window, the modalities, the technicalities are the same. It is the same institutions that will be involved. The institutions over there that will generate these funds, the banks as correspondent banks, the CBN as regulators and BDCs as the operators. So it is the same players, it's just coordinating them and make sure the same thing is applied and everybody is happy.

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