ABUJA — The Central Bank of
Nigeria, CBN, yesterday – May 24, 2016. 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 per cent; Cash Reserve Ratio,
22.5 per cent; and Liquidity Ratio, 30 per cent.
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 per cent, 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 sometime 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.” Policy implications By the new exchange rate regime, CBN
would allow the Naira to float against the US dollar at the inter-bank market,
rather than holding on to a fixed peg. What this means, however, is that buyers
of foreign exchange for 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,
exchange rate is expected to spike, even as many dealers have already
speculated that rates would go up by over 50 per cent 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 involves 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 fields 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. Weak economy 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, high unemployment rate were 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 quickby 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 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
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 market rate ranging from
N300 to about N350 to USD1.
By
Emeka Anaeto, Economy Editor, Emma Ujah, Peter Egwuatu & Franklin Alli
Source: Vanguard
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