FOREX ROUND-TRIPPING BOOMS AS EXCHANGE RATE DIFFERENCE HITS 800 KOBO
By Babajide Komolafe
The limit imposed on banks'sale of autonomous foreign exchange to Bureaux De Change,BDCs by the CBN has triggered a boom in foreign exchange round-tripping. Banks are diverting foreign exchange from the inter-bank market to the parallel market to take advantage of the 800 kobo difference between the inter-bank foreign exchange rate and the parallel market rate occasioned by the limit.
Round-tripping is the illegal sale of foreign exchange sourced from official market into the unofficial segment of the market.
Vanguard investigation revealed that a particular bank sold $1 million to BDCs on Thursday and made a profit of about N8 million. Also parallel market sources who spoke on condition of anonymity told Vanguard that there was an unusual inflow of foreign exchange into the parallel segment of the foreign exchange market between Thursday and Friday.
On Friday, June 24th, the CBN limited the amount of autonomous foreign exchange sale to BDCs to $250,000 per week. This effectively limited the amount of autonomous foreign exchange all the BDCs can purchase from the 24 banks to $6 million per week.
This development, according to foreign exchange operators, was to curb the huge demand for foreign exchange at the inter-bank and official market and hence narrow the gap between the official and inter-bank market exchange rate.
The new policy prompted banks to suspend autonomous foreign exchange sale to BDCs in order to study the market reaction. This caused a lull in the inter-bank foreign exchange market and prompted the inter-bank exchange rate to fall persistently throughout the week.
Consequently, the naira appreciated by 486 kobo during the week as the inter-bank exchange rate fell to N151.095 per dollar from N155.95 per dollar.
The policy also prompted 50 per cent fall in foreign exchange demand at the official market to $497 million from $955 million last week resulting to the naira appreciating at the official market by 202 kobo as the official rate fell to N151.79 per dollar from N153.81 the previous week.
However, the CBN new foreign exchange policy prompted the parallel market rate to rise to N160 per dollar from N158 per dollar the previous week.
The implication of this is that while the gap between the official exchange rate and inter-bank rate had fallen from 214 kobo the previous week, to minus 69 kobo, the gap between the parallel market rate and the inter-bank rate widened from 205 kobo to 800 kobo.
This development is making it more attractive to round-trip foreign exchange from the official or inter-bank market to the parallel market.
Investigation revealed an upsurge in round-tripping of foreign exchange as economic agents act to take advantage of the 800 kobo premium. Parallel market operators said that the exchange rate at the unofficial segement had not risen as sharply as expected as the market has been experiencing unusual inflow particularly from the airports through incoming travellers. This, they said, led to the decline in the depreciation of the naira at the parallel market to just N160 per dollar from N158 per dollar.
It will be recalled that BDC operators had warned last week that the CBN in trying to use the policy to solve a problem might create another. Managing Director/Chief Executive, Bluewall BDC, Mr. Lucky Aiyedatiwa had on Tuesday called on the CBN to complement the policy by increasing the volume of official foreign exchange sale to BDCs, which is currently $5,000 per week.
He said that though the limit imposed by the CBN was well intentioned, it could lead to huge demand gap for foreign exchange in the BDC/parallel market.
He said when the CBN abolished Class A BDCs, which bought $1 million per week from CBN, there was a demand gap in the market which was satisfied through autonomous foreign exchange purchased from banks.
He said in addition to this, the liberalisation of the foreign exchange market in 2006 which led to the admission of BDCs into the official market opened many channels of demand for foreign exchange in the BDC market most of which are met through autonomous foreign exchange from banks.
He said given the fact that the apex bank has severally reduced the amount of foreign exchange sold to BDCs from $300,000 per bidding session to $50,000, the BDC market has had to depend on the autonomous foreign exchange purchase from banks.
He said: 'Now that the CBN has limited the amount of autonomous foreign exchange that is available to BDCs, there would be huge demand gap in the market. These demands are always there and they won't go away.
What will happen is that there would be pressure on the BDC/parallel market exchange rate which is not good for the economy. So, though the policy was well intentioned with the objective of closing the gap between the official exchange rate and the inter-bank rate, it might lead to widening of the gap between the official rate and the BDC/parallel market rate. And to forestall this, the CBN should increase foreign exchange sale to BDCs.'