Fear of election expenses weighs on the Forex market

Last week, the two main political parties, the All Progressives Congress and the Peoples Democratic Party, continued to refine their plans for their presidential and gubernatorial primaries as aspirants from both parties crisscrossed the federation’s 36 states to woo voters. delegates from their parties. , an exercise that financial analysts and the Association of Bureaux De Change Operators of Nigeria (ABCON) have blamed on the ongoing dollar rain in the country and the resulting pressure on the foreign exchange market. Festus Akanbiin this report, reviews the volatile scenario and ABCON’s strategies to end the naira decline

In a cash economy like that of Nigeria, in which financial transactions are conducted in cash rather than by direct debit, standing order, wire transfer or credit card, it is no surprise that the nation is awash with cash at the eve of an election.

Already, market news is pointing in the direction of political spending for the current naira struggles amid speculation about cleaning up available foreign currencies, particularly the dollar, as the campaign period nears.

Analysts say whichever angle we decide to look at the country’s foreign exchange market from, the naira has never been so bad lately as it continues its free fall against the dollar last week. .

The situation is also aggravated by the decline in Nigeria’s foreign exchange reserves which, despite the increase in the price of crude oil on the international market, fell further to 39.650 billion dollars at the end of April 2022, against 39.550 billion dollars recorded in March of This year. . This is according to data extracted from the CBN’s Daily External Reserves Monitor.

Fear of political spending

Nigerian politicians are buying dollars to fund the vote hunt in the primary elections that start in a few weeks, dragging the local currency to new lows in the unauthorized parallel market.

The naira weakened to 600 naira against the dollar last week in the unregulated area, according to Abubakar Mohammed, a currency exchange operator who tracks the data in Lagos. This is the lowest the currency has traded this year at a time when the central bank maintains a tightly controlled official exchange rate.

A market source told THISDAY last week that some politicians had started mopping up dollars as some presidential aspirants from the All Progressives Congress (APC) and Peoples Democratic Party (PDP), Nigeria’s two main political parties, ended their tour of the 36 states to woo delegates to their upcoming party primaries.

The source explained that the naira could only come under more criticism in the coming weeks given the propensity of the Nigerian political class to rely on the use of the dollar to win over delegates to their side. This was confirmed last week by a viral video of a PDP gubernatorial candidate in Osun State, Senator Ademola Adeleke, where he bragged about being ready to contest for voters in using currencies.

It was in this atmosphere of confusion that the Association of Bureaux De Change Operators of Nigeria (APCON) came up with strategies to end the current assault on the naira, explaining that implementing these strategies will save the naira. and the economics of the impact of election spending. which kept inflation in double digits for a very long time.

This disclosure is contained in a statement issued by ABCON President Alhaji Aminu Gwadabe at the end of his National Executive Council meeting held a few weeks ago, where he said there was an urgent need to improve the dollar liquidity in the market and to ensure price stability in the economy.

The ABCON boss said the depreciation of the naira against global currencies was due to pressure from growing demand for dollars without sufficient liquidity to meet the demands of retail end users, manufacturers and other key players in the industry. the economy.

The association, which called for the reversal of the ruling that barred currency exchange operators from access to CBN dollar sales in 2021, said volatility in the forex market could be combated by its new sets of strategies.

ABCON lists strategies to save the naira

Gwadabe outlined some of the strategies to include; The creation of the BDC’s autonomous currency exchange window (BAFEX) with the maximum daily limit determined for legible BDCs to access dollars from banks, and the autonomous market, and the diaspora forex window at market prices in vigor.

It also includes enhancing existing BDC automation portals to file transaction reports on CBN/ABCON/NFIU/NIBSS portals for effective regulatory monitoring and oversight and creating an automation portal to encourage registration of undocumented and unlicensed operators for effective monitoring, identification and identification. monitoring of their transactions.

Others include reviewing BDC’s scope of operations guidelines to include participation in the payments space, such as agency banking, point-of-sale (POS) services, inbound currency transfers and outbound and Forex ATM services, to reflect the practice of the global business model. .

ABCON also wants BDCs to be allowed to access dollars or diaspora remittances through the standalone forex windows allowing traders to receive IMTO products, performing online dollar transactions and point-of-sale (PoS) agency. ), among others. Gwadabe said now is the time to break the current industry monopoly that puts the remittance market in the hands of a few players, depriving others from tapping into the plan.

Gwadabe said ABCON has decided to align itself with the policy direction of the apex bank and ensure that its members perform their roles professionally and strategically for the benefit of the market and the economy.

He warned that the demarketing of BDCs by regulators and security agencies is not good for market stability, but the strength of over 4,500 traders can be harnessed to bring forex closer to retail end users and enhance liquidity in the market. .

Gwadabe said, “We support all measures that would lead to compliance with Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).

“We support CBN’s exchange rate stability policies and urge security agencies to punish any BDC operator who violates corporate governance and compliance guidelines.

“We sincerely believe that the BDCs should be formally reinstated to ensure their strong and continued role in managing exchange rate stability.”

Widening of the gap between official rates and parallel market rates

In its review of the country’s foreign exchange market for the first quarter of the year, ABCON said the widening gap between official and parallel market exchange rates is due to the acute scarcity of the dollar due to the continued suspension sales of foreign exchange to the BDCs by the CBN.

ABCON said so in its quarterly review of the economy for the first quarter of the year (Q1’22), expressing concerns about the inability of fiscal and monetary authorities to cope with the large parallel market and multiple exchange rate in the country.

Commenting on the trend, ABCON said: “A premium is the result of market restraints that stimulate unofficial supply and demand for foreign currencies, which is a symptom of incoherent fiscal and monetary policies. It also shows a lack of credibility of the foreign exchange policy given the level of foreign exchange reserves.

“These fiscal and monetary policies in Nigeria cannot reduce the premium for rent-seeking FX brokers i.e. banks and other intermediaries are of concern and contribute greatly to distortions in the economy.

“Multiple exchange rates cause distortions by manipulating relative prices in the economy and expand opportunities for rent-seeking behavior for those with access to lower exchange rates. When multiple exchange rates are corrected, this would promote a more efficient application of relative market-determined prices to allocate resources in the economy.

The association also pointed to the country’s huge public debt and growing level of poverty, recommending that the federal government reconsider its strategy of depending on debt to grow the economy.

CBN draws attention to banks

In July 2021, the apex bank halted currency sales to Bureau de Change operators, saying the parallel market had become a conduit for illicit currency flows and corruption. The bank said it will also no longer process applications for BDC licenses in the country.

“CBN’s weekly foreign exchange sales will now go directly to commercial banks,” CBN Governor Godwin Emefiele said in a live TV broadcast after announcing that the bank had kept its benchmark policy rate.

“We are concerned that the BDCs have let themselves be used for the transplant,” Emefiele said.

He added that international bodies, including some embassies and donor agencies, have been complicit in illegal foreign exchange transactions that have hampered the flow of foreign currencies into the country.

He noted that organizations have opted to channel forex through the black market rather than using the official Investors and Exporters (I&E) window, called Nafex.

As a result, Emefiele said banks are mandated to “immediately” and transparently sell currency to customers who present the required documents. All banks must immediately create dedicated counters for the same purpose.

The consensus among market watchers last week was for the government to step in to respond urgently to ABCON’s recommendations and put in place additional measures to protect the naira from further plunge as the various parties conclude their plans for their primary elections.

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