Suspension of WDAS:A Central Bank’s Plan to Rein in Activities of the “Bad Boys”

First, it was government spending that was major headache of the Central Bank of Nigeria (CBN), but now it has another added woe, a familiar one, foreign exchange speculators. They are always waiting on the fringe to catch up with any evil opportunity to make additional money.
With the new policy, the liberalization status which was earlier granted the operators as a result of earlier confidence the apex bank had on them has been withdrawn and must now give account for every cent sought at the market.
Now, the CBN‟s bi-weekly Wholesale Dutch Auction System (WDAS) – will be replaced by a bi-weekly Retail Dutch Auction System (RDAS).
Razia Khan, analyst with Standard Chartered Bank, London in a statement said this move partly reverses earlier foreign exchange (forex) liberalization, which allowed banks to collate all bids on behalf of individual clients and make a single forex bid at the WDAS.
Under the retail system, banks will place bids on behalf of individual clients who qualify to buy fore at the official auction. This change will allow the authorities to monitor more accurately various sources of forex demand and any potential duplication of forex demand in the system. Banks will remain responsible for all documentation requirements.
Under the retail system, banks can only buy forex from the CBN against proof that their customers are bidding for forex. Under the previous wholesale system, banks could buy fore from the CBN and then sell the forex to clients, albeit at regulated spreads.
The new regulation should allow the CBN to resume a faster pace of FX reserve accumulation. High demand for FX in recent weeks had led to falling reserves.
Reshu Bagga, head, Analyst Services Proshare Nigeria Limited said the central bank is taking full charge of the market to ensure steadiness. Due to the strong shift of CBN from the Wholesale Dutch Auction System (WDAS) to Retail Auction Dutch System (RDAS) policy and its continuing tightening stance, traders who have bought and stockpiled foreign exchange may face rough times.
The apex bank has temporarily suspended the Wholesale Dutch Auction (WDAS) and reintroduces Retail Dutch Auction System (RDAS), to eliminate opportunities for fraudulent practices in the foreign exchange market.
With the introduction of Retail Dutch Auction System the investors will not be able to stockpile the dollars and create shortage in the market. This is expected to bring about a reduction of parallel imports from other countries as the proper cause of the usage of Foreign Exchange has to be properly documented, thus restrict foreign exchange (forex) users to round trip the dollars.
He new policy will make it difficult for DMBs to extract the money from CBN and sell into the black markets at higher rates.
The policy is also expected to curb banks to speculate in the interbank exchange market and put a ceiling on the illegal remittances to other countries.
This is because funds will not be available throughout the week to meet the needs of customers as banks will not have the buffer.
Banks will have to bid for their customers and CBN will investigate the bids submitted for customers to ensure that they are genuine so banks who used to buy foreign exchange for themselves and later sells to customers will be barred.
In addition, the operations of BDCs will be streamlined as individual cannot register with more than one BDC in accessing forex.
Razia Khan, an analyst with Standard Chartered Bank, London in a statement said the move revert to the RDAS follows the CBN‟s Monetary Policy Committee (MPC) statement earlier last week in which it noted “strong” domestic foreign exchange pressures that it said were “not necessarily linked to an increase in the import of goods”.
Khan said, the existence of forex demand, seemingly impervious to efforts to tighten policy, and the observed slowdown in Nigeria‟s economy have long been sources of concern for the authorities.
Interbank rates spiked briefly to above 40 percent following delays to Nigeria‟s FAAC allocation (the monthly sharing of Federation revenue among the three tiers of government) in September. Even so, dollar-naira continued to trade outside of the preferred band on the interbank market; robust demand for physical dollar cash from the bureaux de change (BDC) segment was blamed.
While the CBN reaffirmed its commitment to forex stability at the MPC meeting, it suggested that rising non-import-related demand for forex may have been attributable to political developments in Nigeria (“the buildup of political activities”) and increasing dollarisation. Following the MPC meeting, Governor Sanusi promised the implementation of new measures “aimed at combating money laundering” among BDCs, which may have served as the conduit for capital flight from Nigeria. The new forex circular brings these measures into effect.

CBN Puts Lid on Cash Transactions Through Hike of Credit/Debit Cards

Also, to curtail “criminal” spendings, the central bank is also discouraging cash transactions by increasing limits on naira credit and debit cards. The limits have been raised to $150,000 per annum from $40,000 previously. This is subject to authorised dealers and card issuers filing monthly returns with the CBN. The settlement of credit card forex transactions will continue to use interbank forex funds rather than forex sourced directly from the CBN through its official forex auctions.
Khan said the reform serves two purposes. First, raising the limit on card transactions discourages the use of physical cash, especially for large amounts. This is in line with the CBN‟s cashless policy initiative, encouraging the adoption of e-channels of money transfer. Second, it gives regulators greater oversight over demand for forex, even when the forex is sourced through the interbank market.
The CBN will now authorise all importation of foreign banknotes
From now on, all importation of foreign-currency banknotes by authorised dealers will require prior CBN approval. Each application lodged to the Director of the Trade and Exchange Department at the CBN will have to state both the amount of foreign- currency cash required and its purpose. The measure reinforces the anti-money- laundering stance of the authorities.
Authorised dealers with banks are permitted to continue to sell cash forex to BDCs, subject to a maximum limit of $250,000 per week per BDC. Authorised dealers will be tasked with performing Know Your Customer (KYC) checks on their BDC clients. BDCs will have to submit weekly returns detailing how they use funds purchased from all sources. If they fail to do this, the CBN will impose “appropriate sanction”.
Previous CBN regulation aimed at supporting the forex rate often imposed new limits on sales to BDCs. By permitting these sales to continue, albeit subject to a $250,000 weekly limit per BDC, the authorities hope to gain better oversight of forex demand in this sector. According to news reports, the CBN has already revoked the licences of several BDCs following particularly high volumes of cash transactions.
Given that BDCs were long viewed as a potential source of forex leakage in the system, these measures should boost confidence in the sustainability of the forex band.
Inflows from international money transfers will be paid in naira only.
Going forward, any receipt of funds through international money transfer companies will be paid out in naira only. Khan said, the authorities hope that this will stem the dollarisation of the Nigerian economy, where foreign currency is frequently used for domestic transactions.
All money transfers will be done at the prevailing interbank forex rate on the day of the transaction. Banks are required to publicise these rates in an open and transparent manner.
Small-scale importers must provide documentation within 90 days of forex transaction
Small-scale importers, paying for non-regulated imports up to a value of $250,000 p.a. using telegraphic transfers, must submit documentation to processing banks within 90 days of the transaction to prove that the imports have been shipped. Authorised dealers are required to report any importers that fail to do this to the CBN.
Implications of the new measures, said is that the naira might strengthens, but long-term fundamentals matter.
The naira has strengthened in reaction to the regulation on BDC demand and complementary measures allowing the CBN to better monitor sources of FX demand. Dollar-naira, which closed at N161.60/$ just prior to the release of the new measures, is already trading back within the CBN‟s preferred band (+/-three percent band around a mid- point of N155/$).
The CBN has shown a strong commitment to maintaining this band. In July, it unexpectedly raised the cash reserve ratio on public-sector deposits to 50% from 12%, withdrawing excess liquidity from the Nigerian market. It has now followed with regulatory measures that address much of the weakness in Nigeria‟s FX system directly at the source.
The measures, an important part of the authorities‟ anti-money-laundering strategy, willhaveimplicationsbeyondthenear-termperformanceoftheFXrate. Bycreating an environment in which large, unregulated cash transfers are more difficult, the authorities hope that Nigeria will make progress in other key areas of law enforcement. Current official estimates suggest that as much as one-fifth of the country‟s oil output is lost to oil theft. Strengthening the country‟s anti money- laundering framework may not eradicate oil theft, but it should help to better regulate the transfer of funds.
Reducing the level of oil theft is still key
“We expect investors to react positively to the new measures. Increased BDC demand for forex, in quantities that were difficult to explain and largely impervious to monetary tightening, had long weighed on the forex