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 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.” Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele 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.
source: vanguard
No comments:
Post a Comment