CBN Finally Hands Off Defending Naira | Independent Newspapers Limited
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CBN Finally Hands Off Defending Naira

Emefiele, fall of naira
Posted: Jun 16, 2016 at 4:30 am   /   by   /   comments (0)

…Introduces Single Market Driven Forex Structure


Bamidele Ogunwusi

Lagos – The Central Bank of Nigeria (CBN) on Wednesday finally broke away from defending the nation’s currency, the naira, under its controlled foreign exchange regime, saying it would introduce a single market-driven foreign exchange platform beginning next week.

The development thus put paid to two windows currently in operation.

The CBN governor, Godwin Emefiele, said at a media briefing in Abuja that the exchange rate will be market determined and that the CBN will also participate in the market occasionally.

He also maintained that the 41 items banned last year from accessing forex for imports remained banned.

The monetary regulatory authority also appointed primary dealers for the first time, which is expected to help boost forex liquidity in the market, promising that latest interbank rates will be posted on the central bank’s website daily from Monday.

Nigeria has resisted devaluing its currency for more than a year despite other major oil producers, including Russia, Kazakhstan and Angola, allowing currencies to fall amid lower crude prices.

However, the new foreign exchange regime would allow the CBN to inject dollars into the market, giving it some level of control over the exchange rate within the limit of severely depleted foreign reserves.

Emefiele also confirmed that all the “pent-up” demand awaiting to be filled like airlines looking to repatriate their dollars out of Nigeria will be met at the interbank market but advised caution for buyers looking to front load orders.

In what was quite a remarkable press conference, he clearly stated that the CBN has enough reserves to meet demand and is willing to put its reserves on the line.

The foreign market, according to him, will also include financial products such as futures where businesses that need dollars in the near distant future can now hedge by buying at a price today but get the dollars delivered when they actually need it.

Emefiele said eight to 10 primary dealers would supply the interbank market with dollars, handling minimum volumes of $10 million.

The primary dealers will be allowed to sell back 70 percent of any dollars bought from the central bank on the day of purchase while sales must be backed by a specific customer order to avoid currency speculation, the central bank said.

Nigeria’s currency dealers will meet on Thursday to discuss new forex guidelines.

Emefiele said Nigeria has been dealing with the effects of three significant and simultaneous global shocks, which began around the third quarter of 2014. These, he said, include the over 70 percent drop in the price of crude oil, which contributes the largest share of the nation’s foreign exchange reserves; global growth slowdown and geopolitical tensions along critical trading routes in the world; and the normalisation of monetary policy by the United States’ Federal Reserve.

“In view of these headwinds, the CBN witnessed a significant decline in our foreign exchange reserves from about $42.8 billion in January 2014 to about $26.7 billion as of 10th June, 2016. In terms of inflows, the bank’s foreign exchange earnings have fallen from about $3.24 billion monthly to current levels of below a billion dollars per month.

“Despite these outcomes, the demand for foreign exchange has risen significantly. For example, in 2005 when we had oil prices at about US$50 per barrel for an extended period of time, our average import bill was N148.3 billion per month. In stark contrast, our average import bill for 2015 was about N917.6 billion per month”.

He added that unfortunately, the interplay between reduced FX supply and rising FX demand accounted for a substantial reduction in the nation’s foreign exchange reserves.

“In order to avoid further depletion of the reserves, the CBN took a number of countervailing policy actions, anchored on the prioritisation of the most critical needs for foreign exchange as well as maintaining stability in the exchange rate. Having allowed two adjustments from August 2014 to February 2015, we decided to manage the naira-dollar exchange rate at about N197/US$1 over the last 16 months, and then provide the available but highly limited foreign exchange to meet the following needs: matured Letters of Credit from commercial banks, importation of raw materials, plants and equipment, importation of petroleum products, and payments for school fees, BTA, PTA, and related expenses”, he added.

However, analysts who spoke to Independent believe that the nation’s economy will be the better for it, while retail currency operators are skeptical that they will not be able to buy from the interbank market, meaning dollars will remain in scarce supply for private individuals and small businesses.

Ayo Teriba, Managing Director of Economic Associates and foremost economist, said the development is a departure from what was in operation before February 2014 when Nigeria has three rates.

“Before February last year we had three rates, there was the WDAS, the interbank and BDCs rates. The WDAS was scrapped in February last year and there has been an attempt by the government to artificially hold the interbank rates up till now. Right now we have two rates, the interbank and the black market rate”.

Teriba added that the new policy meant that the interbank rate would reflect market realities.

“We are about to let the interbank rate reflect market reality. The Bureau de Change rate already reflects market realities, which moves in response to the balance of demand and supply. Basically, what they are trying to do now is to let interbank rate find its true level”.

On the implication of the policy on the economy, Teriba said it will seem that the period that the government has tried to control interbank rate has not been good for the economy and that the step is coming to solve the problem that many at home and abroad have been complaining about.

“The organised private sector argued in favour of increased flexibility. They believed that increased flexibility would encourage potential suppliers of forex to bring it in. When the rate was artificially held at N200, potential suppliers were not willing to bring in forex. They don’t want to be caught in supplying dollars at N200 and buy when they needed money at N300.

“An interbank rate that reflects market realities will be in the interest of such people. If the interbank rate finds its true level the Bureau de Change rate will fall and it will be in the overall interest of the economy”, he noted.

“Over the long run, a weaker currency will help Nigeria’s economy by encouraging import substitution and attracting foreign investors, who have shunned the country for fear of a devaluation,” Capital Economics’ John Ashbourne said.

“But the move will be painful over the short term. Higher import prices will add to inflation. This will probably force the authorities to tighten monetary policy.”

To analysts at Nairametrics the implication could be wide-ranging. They said that the end of the black market is near as anyone and everyone can now buy dollars at any bank or with authorised dealers at a price that is market determined.

They argued that the black market rates will drop as investors and businesses that refused to import dollars into Nigeria can now bring in their forex at a price they believe is market determined. “This might take some time at the worst but we believe the market will be flooded with liquidity in due course. Indeed, we anticipate some volatility as the market takes shape and tracks how liquid the market will be.

“In other countries where a full float was launched, the value of the home country did plummet woefully before it found its level. However, the rates between the interbank market and the parallel market did narrow which we expect will also replicate in Nigeria.

“The CBN governor did not dwell on the controls currently in place such as limits to withdrawals of dollars from your bank domiciliary accounts or spending limits when abroad. However, we believe these limits will be removed in due time as the market becomes more liquid”.