25 May 2015, Abuja — The Central Bank of Nigeria, CBN, yesterday, announced a flexible exchange rate regime aimed at making foreign currencies more accessible. With this action, the CBN has nullified the official exchange rate regime of N197/dollar.
The CBN took the measure following severe pressures on external reserve and foreign exchange supply crisis. Governor of the CBN, Mr. Godwin Emefiele, who announced this at the end of the Monetary Policy Meeting, in Abuja, also said the Monetary Policy Rate, MPR, was retained at 12 percent; Cash Reserve Ratio, 22.5 percent; and Liquidity Ratio, 30 percent.
In the face of severe pressures on external reserves and foreign exchange supply crises, the CBN abandoned its fixed rate policy in favour of a flexible and multiple market model, which implied a floating exchange rate regime. The apex bank’s Monetary Policy Committee, MPC, which made this decision, chose to retain its Monetary Policy Rate, MPR, at 12 percent, Cash Reserve Ratio, CRR, at 22.5 per cent and Liquidity Ratio at 30 per cent.
Details of the new foreign exchange market policy, according to the CBN Governor, Mr Godwin Emefiele, would be released in due course. He, however, said the apex bank would retain a special window to fund critical transactions in foreign exchange, which would likely attract a concessionary rate.
By this development, the interbank foreign exchange market, which has been dead for some time now, is revitalised on unrestricted exchange rate basis, while the Bureaux de Change, BDCs, would continue their operations, thus creating multiple exchange windows.
He, however, ruled out any consideration for channelling foreign exchange to the BDCs. Briefing the media after the MPC meeting, Emefiele explained that “the MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate,” adding that it voted also to “retain a small window for funding critical transactions” and that “details of operations of the market would be released by the Central Bank at the appropriate time.”
By the new exchange rate regime, CBN would allow the Naira to float against the US dollar on the inter-bank market, rather than holding on to a fixed peg. What this means, however, is that buyers of foreign exchange for the importation of goods, holiday, school fees, medical tourism, online payments etc, will have to source from the inter-bank market-determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt.
By this development, the parallel market would have been suppressed, while there would be a near rate convergence among the different market segments except the special window. It also means that round tripping and arbitrage have been curtailed.
However, the exchange rate is expected to spike, even as many dealers have already speculated that rates would go up by over 50 percent today. Analysts at Nairametrics said yesterday: “It is unclear how this will work as the CBN will need to put a massive structural operational framework in place to ensure this works perfectly.
“A market-determined rate will also require strong regulations around a market that involve everyone with prices that are market determined. “One expects the black market to disappear as all you need to do is walk to the bank and ask to buy forex at the market rate.”
Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it. “Any real liberalisation would be accompanied by some tightening, as a stabilisation measure, at least in the short term,” said Razia Khan, Chief Africa Economist at Standard Chartered in London.
“That does not appear to have been considered. This is at best curious, at worst very worrying.” Reacting to the development, analysts from Cowry Assets Management Limited said: “The CBN adopted a more flexible exchange rate policy. A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand.
“In our opinion, the policy decisions will impact the economy on several fronts: We expect current inflationary pressure will continue unrestrained as budgetary disbursement commences. Also, Interest Rate is expected to continue to hover at current levels with an increased double digit outlook. Likely increase in liquidity mop up through Open Market Operation in response to expected increase in budgetary spending. Naira will remain under pressure as market forces adjust the fixed CBN’s clearing rate to a more realistic parallel market rate. There will likely be foreign exchange inflows from domiciliary accounts estimated at USD20 billion as currency exchange risk minimises and capital market activities expected to witness gradual recovery as foreign exchange risk diminishes, with the adoption of a more flexible exchange rate regime.”
Inflation to spike further
However, analysts at Vetiva Capital Management expect inflation to spike in the near term. They said that “it is clear that the MPC has chosen its battle carefully, deciding to loosen one of the key impediments to economic growth (the FX illiquidity). Following from this, we expect the inflation picture to worsen in the near term as a result of the emergence of a new exchange rate to consumer prices. Like we had noted in our April inflation note, we expect inflation to recoil in 2017 from base effects. We believe this view could have further emboldened the MPC’s resolve to adopt the more flexible FX framework.”
Markets to cheer development, stocks, bonds to rally
The Vetiva analysts added: “We recall that financial markets had rallied shortly after the announcement of the liberalization of the Downstream Petroleum sector, partly in expectation of an official pronouncement on the FX framework. Now that the news is official, we expect a knee-jerk reaction to push equity and fixed income markets higher in the coming sessions, pending the unveiling of the new framework by the CBN. Any sustainability, thereafter, would be determined by how markets assess the new framework and its prospects of improving forex liquidity. Overall, we view this development as positive for Nigeria.”
LCCI demands clarification of ‘special window for critical transactions’
The Lagos Chamber of Commerce and Industry, LCCI, yesterday, applauded the Central Bank of Nigeria (CBN) for its new foreign exchange rate policy but demanded that the bank should clarify what it described as a special window for critical transactions for which preferential rates will apply.
In a statement, Muda Yusuf, Director-General of LCCI, said: “LCCI commends the decision of the CBN for the adoption of a flexible exchange rate regime at its recent Monetary Policy Committee meeting, because of its benefits to the economy.
“However, we would like CBN to clarify the window for critical transactions because of possible abuse and distortions that such a window could create. It could pose a risk to the entire system.
We would like to be assured that the window for the critical transactions will be managed transparently and in a manner that will not create distortions in the economy. “We also welcome the decision of the CBN to refrain from further tightening of monetary policy at this time.
“However, as the CBN articulates the framework for the new forex regime, we propose that due consideration should be given to the following: “The economy desires a transparent FOREX market which guarantees a level playing field for all investors. Need for clarity on what the CBN describes as a special window for critical transactions for which preferential rates will apply. We would like to caution against possible abuse and distortions that such a window could create. It could pose a risk to the entire system. We would like to be assured that the window for the critical transactions will be managed transparently and in a manner that will not create distortions in the economy. “Export proceeds, capital importation, and diaspora remittances should be allowed into the economy through the autonomous window at prevailing market rates. And the owners of such funds should have unhindered access to their funds.
“CBN should revisit the list of items that have been placed on exclusion list of the forex market. Many critical inputs of manufacturing companies are on the list and this has crippled the operations of such companies creating significant job and output losses,” he said.
Pressure on CBN
The apex bank has been under immense pressures from the International Monetary Fund, IMF, some financial analysts and interests that represented foreign investors to devalue the Naira. The Buhari administration has until now resisted the calls, explaining that being an import-dependent nation, it did not see how such a strategy would benefit the economy. In fact, it argued that the Nigerian economy would be worse off with a further devaluation of the Naira.
Mr. Emefiele said the economy had been weakened to the point of contraction which was aggravated by the delay in the passage of the 2016 budget that should have provided the needed fiscal stimulus. The fuel crisis, increase in electricity tariff, a high unemployment rate was identified as factors that led to the over 13 per cent current inflation level.
The governor said: “The committee (MPC) acknowledged a severely weakened macroeconomic environment as reflected particularly by the inflationary pressures, contraction in real output and rise in unemployment. “Unfortunately, the delay in the passage of the 2016 budget constrained the much-desired fiscal stimulus, thus edging the economy towards contractionary output.” He pledged, however, that “the CBN would deploy all its instruments with the hope of keeping the economy afloat.”
NESG worries over economy
“Having a flexible interbank market is a good step in the right direction. The decision by the MPC to embrace flexible option for the interbank market is laudable and this is indicative of much more relief for the overheated forex market. With the reintroduction of flexible foreign exchange market, we expect, in due time, to see more forex inflow through diaspora remittances and foreign investment. “We appeal to the CBN to ensure that the new policy is implemented as quickly as possible so as to stem the sliding tide. We opine that the small window for funding critical transaction being proposed by the CBN should be limited to government transactions only, especially in the area of infrastructure development.” Banks unsure of what happens today
Banks unsure of what happens today
Most of the bankers that spoke to Vanguard appear unsure of what the market direction would be today or this week in respect of foreign exchange trading. President of the bank treasurers’ association, Mr. David Adepoju, said bankers would not trade outside the existing policy as CBN had not rolled out the details of the new policy. According to him, if the apex bank allocates foreign exchange on the basis of the existing policy which fixed the exchange rate at between N197 and N199 to USD1 the banks would stay on that official rate. However, a treasurer in one of the banks told Vanguard that from today, there would be dual rates in the banks where the official rate might persist on foreign exchange supplied by CBN at the official rate while independently sourced foreign exchange would trade at a market rate ranging from N300 to about N350 to USD1.
*Emeka Anaeto, Emma Ujah, Peter Egwuatu & Franklin Alli – Vanguard