The Central Bank of Nigeria has eliminated the official exchange rate for the naira, replacing it with a new forex policy which is “purely market-driven.”
However local and foreign financial experts, who welcomed the new policy, say it is, technically, a byword for currency devaluation.
The naira was officially pegged at 197 to the U.S. dollar but experts now agree that it will fall sharply in the coming days to between N280 – N300 to the dollar.
Ten FX primary dealers will be appointed and notified by tomorrow.
The new policy will come into effect on Monday, CBN Governor, Godwin Emefiele said at a press briefing in Abuja yesterday.
He said the structure of the market would operate as a single market through the interbank autonomous window.
“The Exchange Rate would be purely market driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book,” he said.
But the governor said the CBN will participate in the market through periodic interventions to either buy or sell FX as the need arises.
“To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis.
“The new Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines, which would also be released soon”.
According to the governor, the fall in oil revenue has led to a drastic fall in foreign reserves, from about US$42.8 billion in January 2014 to about US$26.7 billion as of June 10, 2016, equivalent to 60% within the period.
He said the monthly FX earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month during the same period.
Despite having fallen, the FX reserve is still robust and able to cover about five months of Nigeria’s imports as against the international benchmark of three months.
Domestic production of items restricted from the FX market is picking up nationwide, Emefiele said.
The 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN circular shall remain inadmissible in the Nigerian FX market. Therefore, they would source from parallel market.
Analysts contend that the robustness of the policy will be determined by how easy and transparent it will be for ordinary citizens to access forex for their needs within the defined guidelines.
Former Economic Adviser to president Obasanjo and Chairman, MTL Board of Economists, Professor Ode Ojowu said the new policy is acceptance of devaluation without announcing how much the exact rate will be.
But he said the CBN is trying to dampen the demand of the dollar against the naira, however, the pressure will still remain since the domestication of local production of many products hasn’t taken place yet.
According to him, naira doesn’t have the capacity to create the needed traffic against dollar especially with the drop in the production of crude oil in the country and loss of confidence in the economy due to the renewed attack by the militants on the oil pipelines.
But Ojowu said the new policy will assist in reducing currency speculations and bring support to the operations of the capital market.
For the immediate term, Professor Ojowu suggested that to strengthen the naira, there is need to domesticate the refining of crude oil, enhance electricity supply and engage massively in food production.
Rislanudeen Muhammad, the former acting managing director/CEO, Unity Bank and CEO, Safmur Investments Limited said the CBN had no business subjecting the naira to unnecessary controls ab-initio adding that the decision had cost the economy hugely.
He however noted that the new regime is better late than never, even as he expressed confidence that investors will return to Nigeria.
“The decision is positive because the initial fear in the market was that the CBN would introduce a dual market exchange rate because of the bank’s previous announcement that it would fund certain critical forex demands as that would have fuelled corruption”, he said.
According to him, the single market regime will engender investor confidence as transparency would return to the market.
He said Nigeria is a huge market and an investors’ delight thus investors would naturally return with this new forex policy.
He however noted that the immediate effect would be that the naira would lose value but in the long term, when the market becomes pretty liquid, the value of the naira would firm up.
Chairman, Nigeria Economic Summit Group (NESG), Bukar Kyari, said: “The bigger picture has always been to open up the market. So we shouldn’t dwell on devaluation as what is important is that the market has been opened up for more liquidity to come in. At the end of the day, once a bit of liquidity is provided, we would see a bit of volatility at the initial stage but the market would essentially take off from there and after a while, we will see stability. So we shouldn’t panic.
“Now businesses can plan their forex needs accordingly as there would be some level of confidence. This policy will also see foreign portfolio investors and managers coming into the market.”
Group Treasurer, First Bank of Nigeria, Eni Ebong, said the new products like the primary dealers and others will help deepen the market.
“This is quite impressive. What is novel is the introduction of the primary dealers with the CBN using them as a tool to intervene which is what we have seen in more developed markets.
“This will aid transmission of excess liquidity across the market. We will see some volatility but it would be contained.
“It will be purely a market determined rate but with the sort of market we have, the CBN would have to intervene from time to time.
“We have had a contracted market in about 16 months so it’s natural for the investors to wait a bit and see how the market plays out before they participate.
“There is a significant amount of Nigerian hard currency money sitting abroad. One would expect that a lot of the first movers will be Nigerian monies coming back or the corporate bodies that delayed their funds coming in for expansion would bring them in.”
Bayo Adeyemo of Citi Bank said: “I’m delighted with most of the actions taken by the CBN. This is positive for the market and the economy. I’m not sure if investors could have asked for more.
“The market initially will depend on the CBN to supply. So the issue of the backlog of forex is critical for the interbank market to work effectively.”
He added that it also puts a lot of responsibility on the primary dealers as they would be responsible to ensure liquidity on a constant basis.
“Now that we have the market back, we expect demand to shift from the parallel market back to the official market – the interbank market as we have it today.”
Source: Daily Trust