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The Role of BDCs in Naira Volatility and the Way Forward

Monogbe is a research consultant and a postgraduate student of Cardiff metropolitan University Wales, UK.,5

The Nigerian Bureau De Change (BDCs) market is a segment of the foreign exchange market that interfaces with customers at the retail end, who, for one reason or another, are unable to access commercial banks for foreign exchange transactions. The BDCs operators are licensed and regulated by the Central Bank of Nigeria (CBN) to participate in foreign exchange transactions, in accordance with the prudential guidelines stipulated by the CBN.

The BDCs, being a segment of the forex market have played significant role in easing the bottleneck of forex transactions. For instance, some basic documentation and registration are required before forex transactions can be successfully completed in the banking institutions, while with the BDCs, less documentation was required until lately, when new regulations require proper documentation. The BDCs are saddled with the responsibility of bridging gaps between the parallel and official markets by interfacing at the retail end with customers at a given rate (ABCON). The CBN describes the BDCs as retail foreign exchange dealers with the mandate of carrying out inward and outward transactions, Personal Travel Allowance (PTA), Business Travel Allowance (BTA), school fees, and medical bills. Over time, speculative reports show that the BDCs have contributed to fluctuations in Naira value and availability. Although, this have not been empirically justified. 

Despite the enormous contribution of the BDCs towards ensuring economic stability in Nigeria, there exist some illicit transactions which constitute a gap fueling Naira instability, and this has been a major problem the nation is facing. The CBN in 2024 put in place some policies to guard against incessant volatility in Naira by reducing the number of BDCs operators in Nigeria to 5,690, increasing the BDCs capital requirement from ₦35 million to ₦2 billion for Tier 1 license holders and ₦1 billion for Tier 2 license holders. Other policies include, eliminating ban on the Nigerian foreign exchange market from accessing forex for 43 items, adopting a free market price determination mechanism, making sure that BDCs operators carryout proper documentation before engaging in forex transaction with customers, and hedging against illicit financial flows. Additionally, the CBN cleared a significant portion of the forex backlog through collaboration with the fiscal authority to stimulate foreign investors and matured forward contracts.

All of these intervention measures and policies were put in place to help regain the Naira's strength and to further enhance financial and economic stability in Nigeria. These policies seem to have yielded positive results in the short run, as the value of Naira appreciated at the forex market between February and mid-March 2024. Subsequently, Naira began to lose its value from March 23, 2024, till date, and this became more worrisome. At this point, lots of concern began to surface among stakeholders, economists, researchers, and citizens as to the role of the BDCs in the wave in Naira value and the efficacy of the recent CBN policy to save Naira from further depreciation.

Lots of factors have contributed to the continuous volatility in Naira value. Prominent among these factors are: insufficient foreign reserves, liquidity problems, unfavorable balance of trade orchestrated by poor local productivity/output, Nigeria being an import-dependent economy, high demand for forex to pay various bills, increased outstanding backlogs caused by forex shortages, market forces (speculators), and many more.

To address the problems and provide lasting solution to the above concerns, economic school of thought explains that when a nation's importation is more than its export, unfavorable balance of trade tends to occur, which will inevitably affect the value of its currency. Therefore, to prevent Naira from incessant volatility, managers of the Nigerian economy should give huge preference to local productivity. Until the nation begins to look inward and gets it right on local productivity, the volatility in Naira's value will remain. The real factor that boosts the value of Naira is productivity. There is need to increase export and earn more forex, produce what is locally consumed, and reduce import dependence. The nation must completely revive other agricultural local products and support/mobilize local producers through sufficient grants for economic revamping and sustainability. Nigeria used to be an agricultural-driven economy before the discovery of crude oil. The discovery of crude oil ignited the 'Dutch Disease' and all attention was diverted towards oil, while all other productive sectors became abandoned. This was the genesis of the Naira's crash in Nigeria, and until the nation goes back to the local production fountain, the Naira's volatility may continue perpetually. Overall, there is need for massive economic intervention through the window of local productivity support.

Contact Info:
Name: Tunde Monogbe
Email: Send Email
Organization: Monometrics

Release ID: 89132069

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