Discontinuation of forex to BDC will affect exchange rate

Analysts expect knee jerk reaction from market participants.

A bureau de change operator counts U.S. currency notes in Abuja [Reuters/Afolabi Sotunde]

Analysts at Cordros Research Ltd. said discontinuation of sale of foreign exchange to the Bureau De Change (BDC) operators would lead to further pressure on the exchange rate in the parallel market.

The analysts said this in a post on the Monetary Policy Committee (MPC) report obtained by the News Agency of Nigeria (NAN) in Lagos.

They said the discontinuation of the sale of foreign exchange to the BDCs would put further pressure on the exchange rate as the commercial banks settle to adjust to the Central Bank of Nigeria (CBN) directive.

The analysts added that knee jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure was another factor.

"Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates," they said.

NAN reports that the CBN Governor, Mr Godwin Emefiele, said the BDC operators had abandoned the objectives of their establishment, which is to serve the retail end-users who needed 5,000 dollars or less.

Emefiele said they had become wholesale dealers and illegally transacted FX to the tune of millions of dollars per transaction.

Given the rent-seeking behaviour of the BDCs, the MPC decided with immediate effect to discontinue the sale of FX to the BDCs and allow the CBN to no longer process or issue new licenses for BDC operations in the country.

The members voted to channel significant portion of weekly allocations of BDC allocations to the commercial banks to meet legitimate FX demands.

They also instructed all commercial banks in the country to create a dedicated teller point in designated branches for the sale of FX for legitimate transactions.

On rates retention, the analysts said the status quo was in line with market expectations.

"The outcome reinforces our view that the Committee is trying to balance supporting economic recovery and attaining price/exchange rate stability.

"We expect that the MPC will lean toward an accommodative monetary stance until it is satisfied that substantial progress has been made in reviving the real sectors from the pandemic-induced slump in 2020.

"We see a strong possibility that the MPC will still favour a hold decision at its September meeting, particularly as the Q2-21 GDP figures would be flattered by a favourable base effect from the prior year.

"However, we think the third quarter growth numbers will be the deciding factor in influencing a rate hike in the November meeting," they said.

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