Currency round tripping thrives at parallel market

Experts have cautioned the Central Bank of Nigeria (CBN) to keep a watch on the foreign exchange market to guard against round tripping by currency traders. Round tripping is a situation where currency traders move currency obtained from the official market to the parallel market in order to take advantage of arbitrage opportunities. This is an unfair market practice that can create an artificial cycle and artificial profits from the racketeering firms.

As analysts at FSDH Securities Limited noted, “The current large premium between the parallel market rate and the official market rate in the foreign exchange market may encourage round tripping of the dollar.” According to FSDH, the CBN should keep watch in order to prevent abuse of the disparity.

The dollar currently sells at the parallel market at ₦167 while the pound sterling sells at ₦275, compared to ₦150 and ₦241.29, respectively, at which they closed at the official market after yesterday’s auction, where the CBN sold $250,000.

The Central Bank, about a fortnight ago, lifted the restriction on tenure of foreign investment in government instruments and also pegged the maximum weekly sale of foreign exchange to bureau de changes (BDCs) to $250,000 in order to reduce pressure on the naira and discourage currency speculation.

Despite the objective of this policy, traders had warned that it could transfer pressure to the parallel market. A treasury officer with a bank in Lagos said foreign exchange at the parallel market has started to go up, adding, “I hope it does not become another worry for the CBN.”

Analysts at Afrinvest, another Lagos-based financial and investment advisory firm, also shared the same sentiment. “In our view, the CBN’s $250,000 limit for BDC’s has created a supply deficit in that segment of the market. Furthermore, the regulator’s inability to consistently meet demand at the official window continues to exert speculative pressure, thus creating undue arbitrage.”

Suleiman Ghali, a currency dealer in Lagos, said the banks were not open in their foreign exchange transactions, hence the pressure in the parallel market. “The banks that have it sell it among themselves. That is why it is scarce. We cannot get even from BDCs. The Central Bank need to be committed to ensure its policies are not flouted. The banks divert the funds instead of releasing it after purchase from the official market,” he said.

Source:Next