Naira depreciation: Black market poised to reclaim forex market

Latest forex news. Also fake foreign currencies have hit the foreign exchange market as fraudsters take advantage of the scarcity to defraud foreign exchange end users.

Last week, the CBN further depreciated the Naira by N7.75 (as at Wednesday) and it also suspended sale of foreign exchange to Bureaux De Change (BDC) operators. Financial Vanguard was reliably informed that BDCs bid for forex on Monday and paid upfront, but the CBN told them to come for dollars the following day (Tuesday). However, instead of giving them dollars as promised, the apex bank told them it was not selling and told them to come back for their money on Wednesday.

This, however, worsened foreign exchange supply in the parallel market occasioning a further rise in the exchange rate to about N142 per dollar on Wednesday and N147 on Thursday.

According to BDC operators, there is scarcity of forex in the market, and should the situation persist, black market operators would regain their dominance as major source of supply in the market and also dictate prices. According to the operator black market operators have returned with full force, and have also flooded the market with fake.

Investigation indeed revealed that this is already happening. Most people that need foreign exchange last week had to resort to buying from the black market as most BDCs did not have currencies to meet demand.

It would be recalled that prior to 2006, when the CBN introduce further measures to liberalise the forex market, and in the process, commenced cash sale of forex to BDC to intervene in the parallel market, the market was dominated by black market operators. They were the dominant supplier of foreign exchange in the market and they dictated the exchange rate as they desired.

In fact, because they offer higher exchange rates, most forex users including government officials, banks and corporate bodies patronise black market operators. Even BDCs relied on them to meet customers demand. They were mostly used to roundtrip foreign exchange from the official market to the parallel market.

This, however resulted to rapidly depreciation of the Naira in the parallel market with the exchange rate touching N151 by March 2006, while the Naira appreciated in the official and inter bank market, where the exchange rate stood at N129 and hence a premium of N22.

Miffed by this situation, the CBN decided to intervene in the market by selling dollars to BDCs. And within six months of the scheme, the parallel market rate crashed from N151 in March to N129 by September. Within this period, black market operators lost their grip on the market and their activities reduced to an insignificant level, as they disappeared from the street.

According to parallel market operators, the foreign exchange sale to BDCs, shifted demand from black market operators to them.

However this gained is been reversed by the scarcity in the market albeit created by the CBN. First, the apex bank reduced the amount of forex sale to BDCs from $300,000 per foreign exchange auction session to about N100,000. Last week it suspended foreign exchange sales to them hence making the BDCs to gradually lose their status as the dominant supplier of forex in the parallel market. And this is compelling foreign exchange end users to again turn to the black market operators.

In fact, a visit to the Airport Hotel, Ikeja or Broad Street, Marina axis on Lagos Island last week reveal increasing presence of these illegal forex operators. Unlike before the present predicament of the Naira, they have become more visible and aggressive in their activities.

Meanwhile, apart from the gradual return of black market operators, Vanguard investigation revealed that the scarcity of foreign has prompted a sharp increase in the margin enjoyed by banks on forex exchange transactions. The margin represents the difference between the buying and selling rate offered by banks to the public.

Hitherto, the margin hovered between N2 and N3 in most banks, but it has now risen to N9 for dollar transaction. For Pounds Sterling N17, and N19 for the Euro.

For example, in one of the top five banks visited by Vanguard, the buying rate for the dollar was N132, and the selling rate was N141 For Pound Sterling the buying rate was N200 and the selling rate was N217 while that of the Euro is N180 for buying and N199 for selling.

Last year the Naira suffered 14.6 per cent depreciation on the average across the three segment of the market while foreign exchange purchased by banks under the WDAS rose sharply by 26 per cent.
The Naira depreciated by 12.9 per cent at the segment of the foreign exchange market while it depreciated by 12.4 per cent and 18.6 per cent at the official and Bureau De change (BDC) segment respectively.

The official exchange rate however rose to N131.27 per cent in December, from N116.81 per dollar in January. The inter-bank foreign exchange rate also rose to N133.03 per dollar from N117.76 per dollar in January, while the BDC exchange rate also rose to from N118 per dollar to N140 at the close of business in December. Consequently, the Naira lost N15.43, N14.46 and N22 at the inter-bank, official and BDC segments respectively during the year.

Further analysis of the foreign exchange sales reveal that in the first quarter the total amount sold stood at $510.1 million. From $364.4 million in January it fell by 82 per cent to $65 million in February but rose by 24 per cent to $80.7 million March.

In the second quarter foreign exchange sold rose by 197 per cent to $1.519 billion. In April it rose by 9.7 per cent to $79.7 million, while it shot up by 571.4 per cent in May to $660.2 million. The increase in sales slowed down to $31.25 per cent in June to $779.9 million.

The increased activities in WDAS sessions were sustained in the third quarter hence total sales rose by 75.9 per cent to N2.673.4 billion. In July, sales rose by 41.8 per cent to $1.106 billion. It further rose by 15.4 per cent to $1.276 billion in August. It however slumped by 77.25 per cent in September to $290.3 million.

Foreign exchange sales peaked in the fourth quarter as total sales rose to an all time high of $7.068 billion representing 164 per cent increase over the previous quarter. In October it shot up by 1529 per cent to $3.365 billion in October. In November total sales dropped slightly by 8.8 per cent to $3.232 billion and further by 161 per cent in December to $470 million.ews. With the increasing scarcity of foreign exchange in the parallel market and further depreciation of the Naira, illegal foreign exchange operators have re-emerged and are poised to reclaim dominance of the market.