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Widening gap in interbank, parallel forex markets spurs round-tripping

By on July 29, 2015

As the Central Bank of Nigeria’s (CBN) earnings-constraining regulations as well as its tight monetary policies continue to eat deeply into commercial banks’ profitability, the yawning gap between the interbank and the parallel market forex rates has created an arbitrage window for Nigerian banks to speculate and round-trip in order to boost their earnings, THISDAY learnt monday.

A top central bank official, who confirmed the development, said that most of the commercial banks are currently involved in currency round-tripping, in their desperate bid to post positive earnings in view of the tough regulatory and economic environment.

Foreign exchange round-tripping or arbitrage refers to a process whereby funds are obtained from the official forex market (at lower rates) and diverted to other markets and sold at a higher rate by forex dealing banks and users.

Presently, while the naira is sold at N197 to a dollar at the CBN regulated interbank market, it goes for about N240 to a dollar on the streets of most cities in the country, thereby creating a difference of N43 per dollar for speculative round-tripping.

The wide differential between the interbank and parallel market was triggered by the CBN’s recent currency curbs imposed on importers of 41 products. This has since pushed forex demand by importers of the items to the parallel market.

Some of the items include rice, wheel barrows, head pans, cement, margarine, palm kernel/vegetable oil, meat and processed meat products, vegetable and processed vegetable products, poultry, private airplanes/jet, Indian incense, toothpicks and tinned fish in sauce (Geisha/Sardines), among others.

“There are strong suspicions of round-tripping going on in the industry because of the wide gap between the interbank and parallel markets and we are now on the lookout to penalise banks found in such unhealthy practice.

“We are aware that round-tripping is going on and the CBN governor has warned that should he catch any bank involved in the act, it is not just the institution that will be penalised, its management would also be severely punished and its managing director removed,” the CBN official said.

When contacted, though the Director, Corporate Communications of the CBN, Mr. Ibrahim Muazu, said he was not aware of the development, he warned that any bank forex dealer caught in currency round-tripping would be sanctioned.
“There are sanctions for anyone or institution involved in currency round-tripping and the central bank will ensure that they are applied accordingly.

“We have been sending out warnings because the rules are very clear. The documentation requirements for forex purchase by banks is being monitored by the central bank and we will not fail to sanction any bank that is caught,” Muazu told THISDAY in a telephone chat.

The Financial Derivatives Company Limited, in its latest economic report noted that “even though the CBN is committed to defending the naira, the currency pressure Nigeria is faced with it becoming more intense.
“The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise”.

The CBN Governor, Mr. Godwin Ifeanyi Emefiele, disclosed at the end of the Monetary Policy Committee (MPC) meeting last week that data available to the central bank showed that most of the activities that take place at the parallel market window, “rather than being for just retail trade, are people doing transactions for what we termed as illicit business”.

“It is important that we begin to embrace best practices, where transactions or activities that take place in the financial system can be monitored,” Emefiele said.

“One of the major mandates of the central bank is to build reserves and maintain a strong exchange rate for the country. I have always maintained since I became the CBN governor that the MPC would as much as possible take decisions that would impact positively on the lives of our people,” he added.