The Central Bank in keeping with the powers vested on it by the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 17 of 1995 and BOFI Act of 1991 recently released new guidelines for the operations of Bureau De Change (BDC) in the country. The CBN, while justifying its action, gave a number of reasons which had necessitated this course of action. These reasons ranged from the fact that the operators have been involved in all manner of malpractices underscored by renting. They also adopted structures and modalities of operations which were not consistent with the spirit that informed the establishment of the BDC in the first place thereby negating the attainment of the objectives that they were meant to achieve.
The Central Bank commenced the injection of funds into the BDCs in 2006 and the numbers ballooned to 938. On commencement of the allocation of dollars to the BDCs $ 200,000 dollars were allocated to each licensed BDC twice weekly. This allocation was increased in 2008 to $ 300,000 dollars twice weekly and by 2009 there were two classes of BDCs with the first category receiving an allocation of $ 1,000,000 per week and category B receiving 100,000 dollars per week. By 2010 as a result of pressure on the reserves with the BDCs representing unsustainable drainage, the allocation was reduced to $ 50,000 per week and has remained at this level of allocation till date. The number of BDCs in operation has since increased to 3,204 with 1,417 awaiting approval and over 200 applications awaiting attention. An average of $ 6 billion per annum had been allocated to the BDCs with the allocation during 2008 reaching a peak of $ 11 billion. The allocation currently averages under $ 9 billion per year and certainly it must be clear to all stakeholders that the reserves cannot sustain this level of drainage.
It must be admitted that the Central Bank in granting licenses to the operators appeared not to have kept in view the expectations of BDC in the caliber of the majority of those it extended licenses to and that was part of the problem. As a result by the manner of the operations of the BDCs they facilitated an environment in which multiple exchange rates thrived instead of the initial expectation that they would help narrow the premium between the official and parallel market rates.
And by the mode of the operations of the BDCs they caused the dollarization of the economy in contravention to the law of the land which made Naira the only legal tender. We must also have heard of reports of some of our compatriots being caught in transit with bags stuffed with dollar currency being taken out of the country. This development contributed in no small measure to the worsening of the image of Nigerians as scammers who carry about massive amount of foreign currencies. And also one of the expectations of the BDCs was that they would provide audit trail to assist the Central Bank gauge the depth of the informal market but this has not been the case in view of the unprofessional manner by which the BDCs have carried on their operations.
But a major fact driving this review of the guidelines is the unstated but generally known reason that the Governor envisages some difficult challenges with the maintenance of stability at the foreign exchange market arising from the fact of the rapidly depleting reserves. The worrisome aspect is that the depleting reserves is happening against the background of a robust oil market since the price of oil in the international market has not sold below One hundred dollars a barrel for more than one year now. But the reserves have not been witnessing accretion largely due to the difficulty the country had experienced in meeting its production quota due to incidences of outright theft, rampant vandalism, illegal bunkering and other related mal-practices.
This reality has the conclusion that the Governor will have no option but to embark on the devaluation of the Naira in spite of his assurances to the contrary based on sound logic. It will be recalled that the Governor was quite explicit during his confirmation hearing that he did not consider devaluation a viable option for an import dependent country like Nigeria. He correctly rationalized that devaluation would only result to imported inflation, undermine productivity, worsen the unemployment situation and therefore the prevalent misery index amongst other deleterious consequences that would follow. A perspective which is not often also highlighted is the fact that the appetite for foreign exchange in the country is to a large extent price inelastic.
In 1986 the country embarked on the Structural Adjustment Program (SAP), when the Naira exchanged for about 22 Naira to the dollar and factor in all the attempts that have been made by the adoption of many and varied approaches to the disbursement of the foreign exchange with a view to attaining stability and yet the Naira has consistently fallen in value to realize the import of this observation. What one is saying in effect is that devaluation which would result in sudden loss in the value of the Naira is not the cure all panacea it is being touted to be as having the potential to reduce the demand for foreign exchange. What will most certainly happen consistent with the country’s experience so far is that the Naira would simply assume a new lower value and progressively continue its journey inexorably southwards in value.
But the conventional wisdom is that the country sees some benefits in the continued operations of the BDCs. What has happened by the increase in minimum capitalization was simply to reduce the number of the BDCs through the merger option to enable them to upscale and professionalize their operations to be able to partner the many foreign currency transfer companies which the CBN is currently licensing. The Central Bank is not unmindful of the difficulties this decision would occasion but it is necessary that at all times we prioritize the greater interest of the Nigerian economy if we would achieve the rapid transformation which we all desire and would wish to witness.
Dr. Boniface Chizea is Managing Consultant, BIC Consultancy Services, Lagos.