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Stocks Surge As CBN Releases New Forex Rules

The Nigeria stock market, yesterday, gained N294 billion in reaction to the decision of the Central Bank of Nigeria, CBN,  to allow market forces determine the Naira exchange rate in a new single structured foreign exchange market. CBN Governor, Godwin Emefiele, yesterday, announced the introduction of a new foreign exchange policy, termed the “automatic adjustment mechanism of the exchange rate” in a flexible foreign exchange regime. The new regime is  aimed at boosting supply of foreign exchange and reducing  the pressure on the Naira.

 

CBN had been under pressure to devalue the Naira for over a year now, which had been resisted by monetary and fiscal authorities, claiming that past devaluations did not benefit the economy, being import dependent. Instead, the apex bank had adopted a controlled market with pre-determined supply and exchange rate. Announcing the major policy shift, Emefiele said: “The Central Bank of Nigeria has always maintained that it would continue to monitor situations on ground and ensure that the bank’s policies reflect these facts and developments rather than the sentiments of any groups or sectors. “It is in the light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market. “The workings of this market will be consistent with the bank’s objectives of enhancing efficiency and facilitating a liquid and transparent foreign exchange market.”

 

The new regime would operate as a single market structure through the inter-bank/autonomous window. The exchange rate would be purely market-driven, using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book; The CBN would participate in the market through periodic interventions to either buy or sell foreign exchange as the need arises; To improve the dynamics of the market, the apex bank will introduce Foreign Exchange Primary Dealers (FXPD), who would be registered with the CBN to deal directly with the apex bank for large trade sizes on a two-way quotes basis; These primary dealers shall operate with other dealers in the inter-bank market, among other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) guidelines; There will be no predetermined spread on foreign exchange spot transactions executed through the CBN intervention with primary dealers, while all foreign exchange spot purchased by the authorized dealers are transferable in the inter-bank foreign exchange market; The 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN circular shall remain inadmissible in the Nigerian foreign exchange market; To enhance liquidity in the market, the CBN may also offer long-tenored foreign exchange Forwards Contract of six to 12 months or any tenor to authorized dealers; Sale of foreign exchange Forwards Contract by authorized dealers to end-users must be trade-backed, with no predetermined spreads; CBN shall introduce non-deliverable over-the-counter (OTC) naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System.

 

This is an entirely new product in the Nigerian foreign exchange market, which would help moderate volatility in the exchange rate by moving non-urgent foreign exchange demand from the Spot to the Futures market; The OTC FX Futures shall be in non-standardized amounts and different fixed tenors, which may be sold on any date, thereby ensuring bespoke maturity dates; Proceeds of foreign investment inflows and international money transfers shall be purchased by authorized dealers at the daily inter-bank rate; and Non-oil exporters are now allowed unfettered access to their foreign exchange proceeds, which shall be sold in the inter-bank market. Emefiele said the primary dealers would be about eight or 10 banks with the capacity to go to the market with as much as $10 million. Timelines Selected foreign exchange primary dealers would be notified by Friday, June 17, 2016. All other non-primary dealers would remain valid and eligible to participate in the market; Inter-bank trading under the new guidelines will begin on Monday, June 20, 2016; and The tenors and rates for the OTC naira-settled FX Futures will be announced on Monday, June 27, 2016.

 

Emefiele said CBN had to take the measures as the nation “witnessed a significant decline in our foreign exchange reserves from about US$42.8 billion in January 2014 to about US$26.7 billion as of June 10, 2016. “In terms of inflows, the bank’s foreign exchange earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month.” He blamed the poor foreign exchange receipts on the over 70 per cent drop in the price of crude oil, which contributes the largest share of our foreign exchange reserves; Global growth slowdown and geopolitical tensions along critical trading routes in the world; and normalization of monetary policy by the United States’ Federal Reserve.

According to Emefiele, “the interplay between reduced foreign exchange supply and rising demand accounted for a substantial reduction in our foreign exchange reserves.” He, however, stated that “our reserves, despite having fallen, is still robust and is able to cover about five months of Nigeria’s imports as against the international benchmark of three months.” He said his team at the CBN would ensure transparency in the new foreign exchange market regime and that there would be no place for speculators. His words: “Let me note that 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 foreign exchange dealing licence of an offending authorized dealer.”

 

Most questions from the public, yesterday, focused on what the role of the CBN would be in determining the exchange rate and what the rate will be like under the new regime. Emefiele said the price will be known when the market opens officially on Monday. He also said the supply side would be market determined, while the apex bank would intervene with supply from time to time to influence market trends in the desired direction. Emefiele’s pronouncements also indicated that the end of the black market is near as buying and selling of foreign exchange is now open to anyone at any bank or with authorized dealers at a price that is market determined. Consequently, black market rates would drop if the CBN announces a float as individuals, investors and businesses, who had refused to import their dollars into Nigeria, can now supply their forex at a price they believe is market determined. The drop in exchange rate may take some time at the worst but the market will be flooded with liquidity in due course. But analysts anticipate some volatility in exchange rate in the short run as the market takes shape and tracks how liquid the market will be. However, the spread rate between the interbank market and the parallel market is expected to narrow in a short while. CBN is also expected to relax the controls currently in place such as limits to withdrawals of dollars from domiciliary accounts or spending limits when abroad as Emefiele stated that exporters were immediately granted unfettered access to use their foreign exchange in their domiciliary accounts.

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