CBN warns IMTO’s against selling forex above ‘approved’ exchange rates pricing limit

In a significant development aimed at stopping forex arbitrage, the Central Bank of Nigeria (CBN) has released a stern warning to all International Money Transfer Operators (IMTOs) operating within the country.

The apex bank warned IMTOs for selling forex higher than the approved rates which is the NAFEX rates plus or minus 2.5%. NAFEX closed at N773.04/$1 on Wednesday.

The warning addresses recent violations and breaches by some IMTOs and outlines potential sanctions for further non-compliance.

Violations Uncovered

In an earlier circular released on August 9, 2023, referenced TED/FEM/PUB/PC/001/006, the CBN provided explicit guidelines and conditions for IMTOs.

The circular clarified essential parameters around payment mode, pricing, and rate quote that must be strictly adhered to while offering international money transfer services.

However, the latest warning issued via a circular dated September 13, 2023, and referenced TED/FEM/PUB/PC/001/009, and seen by Nairametrics, the regulatory body has observed several infractions following routine checks on the activities of these money transfer operators.

The CBN identified issues such as arbitrary rate quotes outside the permissible range, in clear violation of the extant regulations.

However, in the course of routine checks by the Central Bank of Nigeria, it was observed that some IMTOs were operating and acting in breach of above referenced circular. These actions included arbitrary rate quotes outside of permissible range and other sharp practices, in violation of extant regulations.

Such deviations from the rules compromise the stability of Nigeria’s financial markets and have the potential to introduce unfair practices that may disadvantage consumers.

Pricing Limits

To remove any ambiguity, the Central Bank has restated its guidelines on rate quotes, emphasizing that IMTOs are obligated to quote rates within an allowable limit of -2.5% to +2.5% around the previous day’s closing rate of the Nigerian Foreign Exchange Market for their transactions.

What this means is that IMTOs are not expected to sell forex above the 2.5% of the previous day’s NAFEX rates. Assuming the Wednesday rate of N773.04, the exchange rate used by IMTOs to sell dollars will be around N792.73.

However, it appears most IMTOs sell at the black market rates arbitraging from price differentials.

Consequences of Non-Compliance

The CBN has specified a series of sanctions that will be enforced on IMTOs found in breach of this regulation. The penalties include:

Being compelled to sell their forex proceeds directly to the Central Bank of Nigeria.

Suspension from engaging in international money transfer operations.
The potential loss of their operating license.

Going forward, any IMTO in breach of this specific regulation would face sanctions, including but not limited to being compelled to sell their proceeds to the Central Bank of Nigeria, suspension from operations and loss of operating license.

Commentary

This announcement from the CBN aims to put an end to the arbitrage opportunities that IMTOs have been exploiting, although it remains uncertain whether the warning alone will serve as sufficient deterrence.

A longstanding issue with past exchange rate policies has been the persistent disparity between official and black market rates, which provides fertile ground for arbitrage.

This gap often arises from limitations in forex supply, exacerbated by mounting demand pressures—a more complex challenge that the Central Bank must also confront.

Additionally, beyond targeting IMTOs, there’s the concern that retail forex buyers could also take advantage of the arbitrage opportunities, thereby diminishing the effectiveness of the CBN’s warning.