Naira faces pressure as BDC operators attribute depreciation to contractual windfalls

The recent depreciation of the naira in the foreign exchange market has been linked to a surge in forex demand, attributed to windfalls from contractual payments and releases by certain Federal Government agencies.

The Association of Bureau De Change Operators of Nigeria (ABCON) has raised concerns over what it describes as an “unprecedented attack” on the naira, disrupting its recent stability.

ABCON President, Aminu Gwadebe, made this assertion while addressing the sudden downturn in the forex market, which saw the naira depreciate sharply within a short span.

This development follows a period of relative stability, where the naira had strengthened to around N1,500 per US dollar in both official and parallel markets, buoyed by policies implemented by the Central Bank of Nigeria (CBN).

According to Gwadebe, this downturn highlights the urgent need for regulatory authorities to maintain consistency in their forex policies, especially in a volatile market environment.

Providing further insights, Gwadebe revealed that on Friday, the forex market experienced a sharp depreciation of the naira, with the currency losing over N70 against the dollar in a matter of hours, dropping from N1,503/$ to N1,575/$.

“Our findings revealed that a significant portion of the demand surge stemmed from windfalls of contractual payments and government releases,” Gwadebe explained.

“This unfortunate development underscores the importance of consistent regulatory policies in a highly sensitive forex market.”

While acknowledging the market’s volatility, the ABCON boss assured the public that such shocks are often temporary, describing them as “fictitious, discretionary, and a bubble that will eventually burst.”

READ ALSO: BDCs struggle to access forex from Banks as parallel market trades lower than interbank rates

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He urged the CBN to strengthen measures that harness and coordinate forex supply at the retail end, while also clamping down on speculative activities, currency substitution, and hoarding.

To address these recurring shocks, Gwadebe urged the CBN to revisit its forex supply strategy, particularly regarding International Money Transfer Operators (IMTOs).

He proposed that a fraction of IMTO proceeds received by banks and fintech companies should be channeled to Bureau De Change (BDC) operators to enhance liquidity at the retail level.

Additionally, he suggested that fiscal authorities should consider making contractual obligation payments in non-cash instruments rather than direct cash disbursements. This, he argued, would reduce the sudden pressure on the naira caused by large-scale forex conversions.

“The CBN should revisit its prudential percentage targeting on IMTO proceeds to ensure a more balanced forex distribution. Likewise, fiscal authorities should explore alternative means of settling contractual obligations to prevent unnecessary currency substitution shocks,” he stated.

Over the past week, the naira’s value has been on a downward trajectory. In the official market, the local currency depreciated by 1.66% week-on-week, closing at N1,517.24/$ compared to N1,492.49/$ the previous week.

READ ALSO: Naira strengthens as CBN’s forex policy boosts investor confidence–BDC operators

The parallel market also reflected similar pressures, with the naira weakening to an average of N1,520/$ due to increasing demand for the greenback.

The earlier appreciation of the naira had left currency speculators on edge, fearing losses on their dollar holdings. However, the recent volatility has reignited speculative activities, posing fresh challenges for the CBN’s efforts to stabilize the forex market.

In recent months, the CBN has implemented various measures aimed at reducing forex volatility. Notably, on January 28, the apex bank introduced the Nigeria Foreign Exchange Code to promote transparency, accountability, and ethical conduct in the forex market.

Despite these initiatives, the naira remains susceptible to sudden market fluctuations. Gwadebe emphasized the need for enhanced security and intelligence-based financial monitoring to track fictitious transactions and prevent unearned income from exerting undue pressure on the exchange rate.

“The alignment between monetary and fiscal policies has improved, but there is still a need for enhanced surveillance and intelligence gathering to prevent speculative attacks on the naira,” he added.

As stakeholders continue to push for regulatory consistency and policy adjustments, market watchers will be keenly observing how the CBN and fiscal authorities respond to the latest challenges facing Nigeria’s forex market.

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