BDC blames lack of anchor price, disorganized market for naira to dollar exchange rate crash

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

As he came down from the bridge, he called the customer back to inform him that the price was now N640 to the dollar and offered no explanation why. The puzzled buyer on the other line hung up and never called back.

Another, buyer Ken, bought a contribution of $15,000 from his Aboki at N655/$1 apart from his demand for $70,000. An hour later, Aboki called him to tell him that he now has $30,000 in extra cash, but the rate was now N660/$1.

Ken had no choice but to buy, ordering the Aboki to deposit them into his bank accounts.

This shows how volatile the exchange rate has been in recent days.

The news continues after this announcement

Nigerian forex traders aka Bureau De Change are now complaining about the fragmentation of the forex market which has created arbitrage which is causing them to lose massively due to the volatility of multiple exchange rates.

We lose money

Traders who spoke to Nairametrics anonymously expressed frustration with the disparate and unreliable exchange rate wielded in markets across the country.

  • According to them, the disparate rates create arbitrage risks causing some traders to lose millions of naira within hours of closing a trade.
  • “Yesterday I bought for N610 and sold it within hours N620 thinking I had just done a clean N10 spread. To my amazement I found out a few hours later that the rate was not not N630/$1. So, if I had waited, I would have broadcast N20 and not N10. But it is not viable”.

Several other traders complained about the lack of a benchmark to determine forex prices in the open market, a factor they blamed on the lack of selling dollars to the CBN.

  • “Previously, we received dollars from the central bank at an official price. We then mark up this price with a premium and sell. This 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 us dollars, there is no other reference price because everyone just gets dollars from everywhere and sets them as they wish.

Nairametrics also spoke with the Association of Bureau de Change Operators (ABCON) Chairman, Aminu Gwadebe, about why there are different rates in the forex market by dealers. Gwadebe questioned some of the rates quoted in the market, said the rates are

  • Because the market is a disorganized market as well as demand too. So what I’m telling you is uncertainty is the cause. It also depends on the market you are going to. For example, you buy in Abuja, Abuja is not as competitive as Lagos in terms of price. Most of the time, they buy low and sell high.
  • “You know, the environment also determines to a large extent the activity that takes place there, but we in Lagos are buying high and selling high and over there (in Abuja) they are buying low and selling high.”
  • “Liquidity here (Lagos) is good, demand here is moderately business driven as you have importers etc. Also if you are calling from Abuja I will give you the politicians rate and their rates are higher. ”

Why are we in a dollar crisis?

According to central bank data, Nigeria earns foreign exchange from 6 major sources namely,

  1. Capital imports – (REIT & FDI),
  2. Loans – Eurobonds, other multilateral loans, swaps,
  3. Diaspora remittances,
  4. Exports – oil and non-oil,
  5. Investment income – dividends, interest and,
  6. Other autonomous sources – (e.g.: domiciliary accounts, receipts, etc.).
  • Since the outbreak of Covid-19, entries on all 6 channels have decreased, forcing a shortage of currency available in the country. While we have shortages of entries, the demand for dollars (exits) has increased, especially as the summer season approaches.
  • There are also concerns that the situation will likely deteriorate as companies seek to secure commodities as we enter the end of the second half of the year.
  • Finally, the absence of a structured market means that those who have currencies sell at the price they desire since there is no anchor price, platform or exchange where the prices are listed. The only exchange available is the FMDQ but traders have no confidence in the price.

What is the solution?

Nairametrics believes that the solution to the crisis is the absence of an anchor price or black market forex price determining mechanism. Since traders do not believe in the official NAFEX market, there is no alternative market with the structure for effective price discovery.

  • Therefore, the solution could be for BDC traders to create an exchange where their trades can be captured transparently and the price determined. This is how trading works globally, especially forex.
  • Some of the operators admit that it was brought up individually in a WhatsApp group where BDC operators often chat, but the concern is that the central bank does not approve of it.
  • Most analysts talking to Nairametrics also insist that the CBN will have to allow the Investor and Exporter (I&E) window function as it was originally designed. Rather than fixing the price at the current N414-420/$1, the CBN will have to allow tariffs to adjust upwards based on the forces of supply and demand.
  • This will instill confidence in the market and allow companies with foreign currency inflows to repatriate to the country rather than leaving them in foreign accounts as is currently the case.

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