CBN At Last Releases Naira To Dictates Of Market Forces … 41 Items Remains Inadmissible In Forex Market Transactions

After a year of staying glued to a fixed exchange rate regime, the Central Bank of Nigeria (CBN) has finally floated the naira, allowing it to follow the dictates of ten forces of demand and supply, Godwin Emefilie, CBn governor made this known yesterday.
The apex bank however insisted that, the 41 items earlier suspended from gating foreign exchange from the official market shall remain inadmissible in the forex market for forex transactions.
Thus, the central bank in response to one of the commitments of the last Monetary Policy Committee (MPC) meeting, yesterday highlighted the followings regarding the “much awaited” introduction of the flexible foreign exchange market.
The regulatory authority said market shall operate as a single market structure via the interbank market and authorized dealers, and that it purely will be based on an exchange rate market managed via Thompson Reuters platform.
The highlights include the fact that the CBN will participate via periodic intervention and will introduce primary dealers that deal with CBN on a two way quote basis.
It said, primary dealers will deal with other players in the interbank market and there shall be no pre-determined spreads on forex transactions and all forex purchases are transferable.
It categorically states that 41 items shall remain inadmissible in the forex market for forex transactions
Emefiele said the CBN will offer long term forex futures, while sale of forex forwards for end users must be trade-backed.
The new rule also introduce non deliverable Over-The-Counter (OTC) forex settled trades to help moderate volatility.
The OTC settled forex feature shall be on non-standardized amounts and proceeds of forex shall be purchased by authorized dealers at the daily interbank rates
The interbank trading will begin on Monday June 20 and tenors and rates for OTC settled forex feature to be announced June 20 also.
The Governor noted that national reserve is higher than pent up demand in the market and all maturing LCs will be moved to the interbank market for clearance.
Emefiele said “the Central Bank is strongly determined to make this market as transparent, liquid, and efficient as possible. Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders.
“The CBN expects all authorized dealers particularly to display the highest level of professionalism. We expect them to understand the spirit and letter of this transition to a market based system. The CBN will not allow the system to be undermined by speculators and rent-seekers.
“Permit me to emphasize that any attempt to breach any aspect of this new framework will be heavily sanctioned by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing license of an offending Authorized dealer,” he said.
The CBN governor urged market participants to assist in ensuring that this new system enables the CBN to pursue its mandate in a more effective and efficient manner, which guarantees preservation of our scarce commonwealth, stability of our financial system, and growth of our economy to the benefit of all Nigerians.

Analysts React

For operators and analysts in the financial world, the step by the apex bank to free up the market is one in the right direction as it will not only converge rate but also remove abitrage opportunities and artificial demand from the market.
The new policy which also brings in the futures market according to traders and analysts also expected to increase the inflow of foreign direct investments as well as portfolio investments into the country.
Head, Research at Sterling Capital Limited, Sewa wusu, noted that while the parallel market will still exist the new policy will remove “ abitrage opportunity” in the market. He also noted that “the true value of naira exchange rate vis a vis the dollar will be determined on that market. And that is very good enough because before now we don’t know what the true value of the naira.
“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 abitrage 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 futures end of the forex 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 futures market being introduced will ensure that demand that are not immediate can be offloaded through the futures 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.”
He however, expressed concern over the non removal of restrictions on the 41 items that were banned from accessing the official foreign exchange market, 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.”
Bureau de change operators are however not so happy with the policy as the apex bank had been silent on their issue. There had been no mention of BDCs in his speech. President of the Association of Bureau De Change Operators of Nigeri (ABCON) Aminu Gwadabe told Leadership yesterday that the decision of the apex bank “is not a fair relationship” as it “will favour a few”.
According to him, licensing 10 primary market dealers for an import dependent country with a population of over 180 million is not a fair representation. He however noted that the BDCs will continue to engage the apex bank on the way forward.
Razia Khan, Managing Director, Head- Africa Macro, Global Research, Standard Chartered Bank, London said rising price pressures were likely instrumental in the authorities’ changed stance on foreex policy. Nigeria’s fixed exchange rate regime had merely pushed activity to the parallel market, which is prone to overshooting, less susceptible to formal policy tightening, and likely played a significant role in exacerbating current price pressures.
The challenge for the authorities is how to go about normalising the forex regime, and more broadly, activity – in their bid to resolve fuel and other supply bottlenecks that have constrained growth while driving inflation higher.
Given where inflation already is, there will be a need for gradualism. However, in our view, any moves towards meaningful forex flexibility will need to be supported by tightening, in order to restore some degree of credibility to policy. This may well have implications for the timing of any announcement on currency flexibility.

Bank Shares Rise In Anticipation Of New Rules

Banking shares rose early yesterday before the central bank introduces a new foreign exchange policy, aimed at attracting foreign investors.
Domestic investors snapped up shares in banks, expecting the new policy will help generate foreign currency business, which had dried up under current currency policy, Reuters said.
The index of Nigeria’s banking shares jump 2.50 per cent by 1145 GMT, outperforming the broader index, which rose 1.09 percent to 27,327 points. FCMB and FBN Holdings each rose more than five per cent.
The central bank announced last month it planned to abandon the naira’s peg to the dollar, established 15 months ago. That policy has overvalued the Nigerian currency, hurt investments and damaged the economy.
Traders said domestic investors were buying bank shares at cheap valuations, hoping that a more liberal currency market and a recent stock-market rally will draw foreign investors, who have avoided Nigeria and the risk of a currency devaluation.
“When we see the market pricing the new reality and the stocks de-rate to reflect the new profit base, we will let that shake out happen and let the forex find an appropriate level. It might well over-correct, which will give us an opportunity to buy,” said Rob Marshall-Lee, investment director at Newton Investment Management.
Africa’s biggest economy is facing its worst crisis in more than decade. Plunging oil prices have slashed government income, weakened the naira and forced the central bank to introduce controls to support the currency.
Emefiele said last month the central bank would adopt a flexible policy on the interbank market and abandon a de facto peg of N197 to the dollar. It will also retain a window for funding critical transactions, creating a dual exchange rate.
The naira was trading at N370 to the dollar on the black market on Wednesday.
Marshall-Lee says the currency may weaken up to 50 per cent, which would erode consumer income and cause company profits to fall in the short term. But he hopes that a more liberal currency policy will help the economy to reset.
He said his fund favoured Guinness Nigeria, Nigeria Breweries, Zenith Bank and Guaranty Trust Bank (GT Bank) as they were more likely to weather the storm and see good future growth.

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