What CBN’s Ban On BDC Operators Means For The Economy
The Central Bank of Nigeria at the 137th monetary policy meeting held on July 27, 2021, ended with the apex bank holding nothing short of a stop selling forex to Bureau De Change (BDC) operators. Godwin Emefiele, who made the announcement, also declared the cessation of licensing to BDC operators in the country, in what he called a fight against illegal activities perpetrated by BDCs.The CBN governor stated that the biggest fear among BDC operators was that they were creating artificial currency scarcity in an effort to seek “abnormal” profits, introducing risks to the Nigerian financial system.
He further highlighted various behaviors deemed not conducive to CBN’s price stability goals, such as rent-seeking BDC operators interested only in large margins, dollarization of the Nigerian economy, undermining of the cashless policy, common ownership of several BDCs by the same owners to obtain multiple FX, and ‘unfortunately’ international organization and embassy patronage from illegal FX dealers.
This highly unprecedented act by the CBN is certainly not without consequences and is received with mixed feelings by the public.
According to the central bank governor, there are currently more than 5,000 BDCs in Nigeria. Nigerians have adopted the use of BDCs for their forex needs mostly for convenience as banks typically require strict and lengthy procedures including filling out forms, waiting in queues, etc. The complete ban on BDCs now would mean there would be a decline in the number of outlets for the supply of dollars, which in turn would create the appearance of scarcity.
Also, banks would now be under pressure to meet the needs of Nigerians as they are now the only ones licensed to meet forex needs unless they find a way to optimize. Orders previously placed with BDCs are now being diverted to bank operatives/FX desks that require sufficient staff to meet the increased need for retail administration. As for customers, they have to brace themselves for many inconveniences because they would have too few alternatives to go to the bank branches.
This decision digs deeper and exposes the country to a potentially bigger currency crisis than the current one, as many administrative bottlenecks need to be removed. The ban on BDCs obviously implies a shortage of supply, which in turn could push the price up.
In January 2016, the top bank took a similar step against BDCs, and things didn’t end well for the country. On January 11, 2016, when the CBN banned BDCs, the exchange rate was N268/$1, but by December 31, 2016, the exchange rate had crumbled to N495/$1. In fact, during this period, the devaluation amounted to 46% while the dollar gained a whopping 85% against the naira. This was because, after the ban on BDCs, dollar scarcity persisted on the retail and wholesale side of the forex market. This led to both artificial and real scarcity for forex, leading more people to go to the black market to buy forex. In fact, those who were able to get forex from the official market just went around going to the black market to sell their treasure as it had become a very profitable business.
The CBN had to intervene in 2017 with the introduction of a costly policy of selling Open Market Operations accounts at very high-interest rates to foreign and local institutional investors, thereby attracting dollars from abroad. These foreign portfolio investments helped the exchange rate fall favorably from N505/$1 to about N363/$1. However, the probability that this is again a solution may not be the same as that of foreign influx collapsed 61 minutest year on year in the first half of this year.
Nigeria is already experiencing heavy inflation, with official inflation not even reflecting market events. With purchasing power already declining, a further devaluation of the naira will mean a higher standard of living for the average Nigerian.
Also, as mentioned earlier, there are up to 5000 BDCs recognized by the CBN. The cessation of their activities implies addition to the pool of unemployed Nigerians.
In conclusion, the ban on BDCs will only end well for Nigeria if the Central Bank can configure its administration to effectively manage panic buying and other calamities.