Banks flout CBN directive on exchange rates

By Oluwaseyi Bangudu




August 31, 2009 08:10PMT
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Three weeks after the Central Bank of Nigeria (CBN) expressed concern over the widening gap between the Whole Dutch Auction System (WDAS) and the interbank exchange rates, some Bureaux de Change (BDCs) operators think nothing has changed still in the forex market.

According to some BDC operators at Marina, Lagos, the Central Bank needs to step up its monitoring checks and balances if it would achieve its desired stability in the forex market. Banks are clearly not adhering to the Central Bank's order of only a 50kobo spread between their buying and selling rates.

Gali Suleiman Kabiru, a representative of some BDC operators at Marina, explained that the bank rate for the dollar was fast approaching the rate at the parallel market. "Bank rate is almost the same with black market; they are selling it too high," Mr. Kabiru said. "The Central Bank is selling it to them at official rate, about N150 or N151 and then they sell it at N158 or N159. The gap is too much.

Bank officials respond

But, to a staff of Oceanic Bank, who spoke on condition of anonymity, the complaint holds no water. "It is a lie; they (BDCs) are just lying," he said. "Even after adding the charges for the various processes involved, the maximum we add on the Central Bank's rate is N1. I learnt that some banks are adding a N2 rate to the auctioned rate, but that's the maximum," he said.

An official of Intercontinental Bank explained that there was supposed to be a maximum premium rate governing the procedure. "It's between one or two per cent premium, a maximum of 2 per cent of the actual price," he said.

Central Bank concern

Earlier last month, the Central Bank, in a statement dated August 3, expressed concern at the widening spread between the auctioned price of the dollar and its interbank exchange rates. The bank's explanation for the wide variance was also stated in the circular. "This has been traced largely to authorised dealers who purchase funds at the WDAS window and sell at the inter-bank market. As a result of this activity, the end-users end up paying a high price for foreign exchange due to the arbitrage activities of the banks."

The Central Bank also reminded authorised dealers of the maximum spread in their buying and selling rates. "Authorised dealers are reminded that the spread between their buying and selling rates must not exceed 50kobo," the circular added.

It also said that funds procured from WDAS are not eligible for trading among authorised dealer banks.

However, the bank was not forthcoming on the issue when contacted. Mohammed Abdullahi, its head of corporate affairs, said in a telephone conversation that he would have to inquire from the relevant department of the regulatory body.

"Let me contact the CBN department concerned as I do not have the details of those sanctioned, if any have taken place," Mr. Abdullahi said. Then he added: "The director concerned is in a meeting."

Nevertheless, the circular had a final warning: the failure of authorised bodies to comply with its regulatory guidelines will lead to the "withdrawal of authorised dealership".

Repeat after me: "exchange rate is controlled by demand and supply"

Seun:

Repeat after me: "exchange rate is controlled by demand and supply"

******************

Did you bother to read the article before your lecture on fundamental Economics 101? The crooked banks in Nigeria are creating an artificial scarcity of forex in the official market thus boosting the black market rates. The CBN has been sending cease and desist orders to banks who have been receiving forex for sale at the official market only to turn around and sell such at the black market.

You still don't get it.  Any "official" exchange rate separate from the prevailing
"black" market rate is an attempt to fight the forces of demand and supply. 

The only way you can bring down the naira price of the dollar is by injecting more dollars
into the system.  I.e. increasing the supply to meet the demand.  End of story.

The reason the exchange rate is crashing is simple: the price of oil has gone down.
The CBN is just playing politics by blaming the banks. It's all about dollar supply.

Seun:

You still don't get it. Any "official" exchange rate separate from the prevailing
"black" market rate is an attempt to fight the forces of demand and supply.

The only way you can bring down the naira price of the dollar is by injecting more dollars
into the system. I.e. increasing the supply to meet the demand. End of story.

The reason the exchange rate is crashing is simple: the price of oil has gone down.
The CBN is just playing politics by blaming the banks. It's all about dollar supply.

**********************

When the banks buy dollars from the CBN and you as the customer goes to your bank with your pro forma invoice to buy dollars and the bank lies to you that they not have any dollars. What do you think that does to the supply of forex in the open market?

I agree that the slide in the price of crude has adversely affected the Naira but there is a lot more that affects an exchange rate other than the price of a country's primary export product. What do you think the exchange rate will be if the supply and demand for dollars were at an equilibrium? Give me a guess.

Nigerias' current account deficits, balance of payments and purchasing power parity all play a role in the exchange rate.

$140 barrel of crude is not coming back anytime soon and every small manipulative action by market players will have ramifications on the exchange rate.