As CBN Unchains Forex Market

As CBN Unchains Forex Market

Finally, the Central Bank of Nigeria (CBN), has done the needful in the foreign exchange market, but not before some companies have collapsed, a few relocated, and workers sacked. Blessing Anaro and Bukola Idowu write.

With the unchaining of the Nigerian foreign exchange market, few days ago, the Central Bank of Nigeria, CBN, and the federal government have finally come to realise that no community or country can thrive in isolation. Foreign investors had advised along this line; the International Monetary Fund (IMF) and the World Bank also advised, but there appeared to be no listening ear.

With the freeing of the forex market, hope is now on the rise, as portfolio investors are likely going to come with the much needed funds to fill some very wide gaps. There is now a growing possibility that, closed firms will re-open shop again and more people employed. Already, the capital market, like an excited kid is beginning to look up. Perhaps, the only fall guys are the bureau de change operators- steam has been taken off them as the naira is finally allowed a breather, let out of the cage- and its value can now be determined by market forces.

Analysts however believe that, the Central Bank saved some face by still keeping the 41 items on the leash, caged out of the official exchange market.

The unleashing of the naira had been surprising as many had expected another technical devaluation of the currency and a dual exchange rate regime, as the CBN governor, Godwin Emefiele had explained after the Monetary Policy Committee that the apex bank will leave a small window open for critical transactions.

Before the release of the policy, tension had built up in the foreign exchange market, particularly the parallel market where the value of the naira dropped by 5.7 per cent in two weeks from N350 to around N370 to the dollar. Following the announcement, the naira had gained strength selling at N365 to the dollar.

The value of the naira at the parallel market had plummeted along with global oil price which has greatly impacted the revenues of countries, although the local currency had been stable around the N197 to the dollar band of the apex bank. This had been due to the various restrictions that the CBN had put in place to slow down the depleting of Nigeria’s external reserves.

The reserves had declined from about $42.8 billion in January 2014 to $26.45 billion as at June 14, 2016 causing a withdrawal of foreign investments as fears that the apex bank would not be able to sustain support of the currency at the current level continued to grow. Some foreign airlines had withdrawn from the country claiming that it had become difficult to access foreign exchange to repatriate their funds, as more portfolio investors also pulled out.

Despite these effects, the CBN had remained adamant against devaluing the naira insisting that it would not be to the benefit of the country. The CBN governor speaking at a press conference to announce the details of the new flexible policy stated that it was as a result of the apex bank’s resolve to ensure that the its policies reflect these facts and developments rather than the sentiments of any groups or sectors.

“It is in light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market. The workings of this market will be consistent with the bank’s objectives of enhancing efficiency and facilitating a liquid and transparent foreign exchange market,” Emefiele stated.

Stating that under the new policy, the “market shall operate as a single market structure through the inter-bank/autonomous window,” Emefiele said the exchange rate would  be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.

The apex bank said it will participate in the market through periodic interventions to either buy or sell foreign exchange  as the need arises. Asides this, it also said it will register foreign exchange Primary Dealers (FXPD) which it will deal with directly on a two-way quotes basis for large trades. These primary dealers according to the apex bank, will  operate with other dealers in the Inter-bank Market, amongst other obligations.

Also, the CBN brought to the table non-deliverable over-the-counter (OTC) Naira-settled Futures, to help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market. According to Emefiele, the CBN may also offer long-tenored FX Forwards of six to 12 months or any tenor to authorized dealers to enhance liquidity in the market.

Analysts, traders and operators in the Nigerian financial system have continued to applaud the move of the apex bank. Analysts at FBN Quest, in an emailed note had said the apex bank decision “exceeded our own, and most expectations with the more flexible exchange-rate policy it promised in the communiqué after the meeting of the Monetary Policy Committee on 24 May.”

The two sets of new operational guidelines for Primary Market dealers and one foreign exchange market published on the CBN website were described as bold steps, as the tightly managed rate and the idea of special access for “critical transactions” were dropped. They will be replaced by an interbank market in which new primary dealers will transact with the CBN on large trades.

Authorized dealers, who are to transact with the primary dealers, are to purchase the proceeds of international money transfers as well as foreign investment inflows, both direct and portfolio.  This is a welcome step to capture some of the flows of remittances, which total $21 billion annually.

With the new policy, the CBN will participate in the interbank market and through what it terms Secondary Market Intervention Sales (SMIS) and its position as the largest single seller in the market clearly brings some influence over the exchange rate and along with it, investor confidence.

These steps taken by the apex bank has been hailed by analysts and traders, who believe that the new policy will not only converge rate but also remove arbitrage opportunities and artificial demand from the market. It is also expected to increase the inflow of foreign direct investments as well as portfolio investments into the country.

Financial analyst, Jurgen Hecker noted that “this decision could lead to foreign investment coming back into the country, which will help development in the medium to long term. Importers of goods and services will now also find it easier again to buy dollars to pay for those imports.”

Hecker while commending the move said choosing an official devaluation means that importers  will need to pay many more naira for the dollars that they need, “and this will feed back into prices that Nigerian consumers have to pay for everything that is imported, which as we know is almost everything.”

Head, Research at Sterling Capital Limited, Sewa Wusu, concurred saying the free float system will allow for the inflow of foreign direct and portfolio investments into the country. He noted that one of the good things about the new policy is that it will curb “arbitrage opportunity” in the market, adding that “the true value of naira exchange rate vis- a-vis the dollar will be determined in that market. And that is very good enough because before now we don’t know what the true value of the naira is.

“What we were seeing was the parallel market or black market rate but now it will be the official standpoint view which is market determined by the CBN through the interbank window. Market-driven means the forces of demand and supply will intervene. That will fizzle out arbitrage opportunities and allow rates to converge at that interbank window which is fair enough. What it means is that people can now see the true reflective rate of the naira and they can determine that to plan for their businesses.”

On the feature end of the Foreign Exchange Market, Wusu said it will allow for proper planning by companies. “With that platform most end users can originate deals for the future and it will be flexible enough that they can know the exact rate at which dollar, naira rate will be at the time they need it. It will help end users particularly those that do volumes to hedge their trade for the future transactions.”

Also Robert Olatunde of Afrinvest, commended the move of the apex bank saying the Features Market being introduced will ensure that demand that are not immediate can be offloaded through the Features Market “and that takes out the artificial demand that are not immediate. What is good is that the CBN has standardized it and they will provide guarantee.”

To analysts at Cowry Assets Management Limited, the Nigerian market “should now be attractive to investors as their earlier fears of foreign exchange illiquidity and likely devaluation would have been mitigated. The introduction of derivatives such as customised forward contracts should help investors further hedge against foreign exchange volatility while simultaneously being a major step towards developing the important alternative asset market.”

The apex bank however maintained its stance against allowing the 41 items for foreign exchange access in the market, a move that Olatunde of Afrinvest expressed concern over saying “ in our view, that may still create some form of market distortion but in any case what they have done now is just to bring in some respite into the market.”

Also the CBN had maintained its stand on not giving bureau de change access to the official end of the market, as it specifically said “inter-bank  funds  shall  not  be  sold  to  bureaux de change.” Bureau de change operators are however not so happy with the position the apex bank as the president of the Association of Bureau De Change Operators of Nigeria (ABCON) Aminu Gwadabe told LEADERSHIP Sunday that the decision of the apex bank “is not a fair relationship” as it “will favour a few,” He, however, noted that the BDCs will continue to engage the apex bank on the way forward.

Moving forward, the CBN governor stated the resolve of the apex bank to create a transparent, liquid, and efficient market. “We would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders.”

LEADERSHIP