Forex Crisis May Ease as CBN Begins Flexible Policy

CBN Governor, Godwin Emefiele

• Apex bank promises to clear letters of credit

• 41 banned items remain inadmissible

• Reserve covers five months’ imports

As the Central Bank of Nigeria (CBN) yesterday began the implementation of the flexible foreign exchange (forex) management in the country, it assured stakeholders that the new policy would deepen the market.

The flexible foreign exchange (forex) management basically means the adoption of a market-driven exchange rate policy of the naira against other currencies. The new policy, CBN Governor Godwin Emefiele said, would be a single window market. He reassured holders of all backlog of mature letters of credits ( LCs) that they would be cleared immediately while primary dealers operators expected to be the major link between the apex bank and the market are expected to possess a minimum paid-up capital of $10 million.

Emefiele gave the assurance yesterday in Abuja while unfolding the framework of the much-anticipated new forex regime announced by the Monetary Policy Committee (MPC) of the apex bank penultimate week in Abuja as part of measures to address on a permanent basis the inadequate supply of foreign exchange occasioned by the declining fortunes from oil minerals proceeds.

An estimated $5 billion has in the past three years gone down the drain from the country’s foreign reserves trying to support the value of the naira against other currencies of the world.

The CBN governor explained that the assurance of enough supply of forex in the market to meet the demand was based on the fact that Nigeria, despite the depletion in the foreign reserves, still has a robust war chest far above the internationally recommended threshold and reassured that the apex bank would continue to intervene in the market .

Emefiele said : “ Take it easy, there is no need for everybody to rush to the market because you may even hurt yourself doing so. The steps we have undertaken will equally deepen the market as investors who have been standing on the sidelines too would be coming in. We have also committed ourselves with the level of guarantees that we are offering. Therefore be calm. There is no cause for alarm,” Emefiele reassured .

He gave some highlights of the new forex regime’s operational framework which include: the market shall operate as a single 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; and the CBN would participate in the market through periodic interventions to either buy or sell FX as the need arises.

He also said in order to improve the dynamics of the market, “we will introduce Foreign Exchange Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the bank for large trade sizes on a two-way quote basis.

Also, “these primary dealers shall operate with other dealers in the inter-bank market, amongst other obligations that will be stipulated in the FXPD guidelines” which he said would be released after the briefing.

Other aspects of the framework include that “there shall be no predetermined spread on forex spot transactions executed through the CBN intervention with primary dealers, while all forex spot purchased by authorised dealers are transferable in the inter-bank forex market; the 41 items classified as ‘Not Valid for Foreign Exchange’ as detailed in a previous CBN circular  remain inadmissible in the Nigerian forex market.”

Besides, non-oil exporters are now allowed unfettered access to their forex proceeds, which shall be sold in the inter-bank market.

He announced that in terms of timelines, management of the CBN agreed to among other things, release immediately the detailed operational guidelines for the Flexible Foreign Exchange Market as well as the guidelines for the selection and operations of Forex primary dealers who would be notified by tomorrow;  all other non-primary dealers would remain valid and eligible to participate in the market inter-bank trading under the new guidelines to begin on  June 20, 2016; and finally that the  tenors and rates for the over-the-counter naira-settled forex futures will be announced on June 27, 2016.

Warning that the apex bank would view infraction by operators seriously, he reassured that the bank would make adequate provision for forex supply : “ 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 authorised 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 emphasise 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 Forex dealing licence of an offending authorized dealer.

“  I therefore urge market participants to assist us 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. Over the intervening period, we are happy to note that these policies have yielded some positive developments.

“In particular, we have managed to stabilise the exchange rate since February 2015, thereby creating certainty for both household and business decisions, and also underpinning the economic growth we recorded in 2015. We have largely eliminated speculators and rent-seekers from the Foreign Exchange Market”.