By John Omachoonu | BusinessDay, Nigeria June 16, 2016
Analysts and investors yesterday cheered the new foreign exchange market unveiled by the Central Bank of Nigeria (CBN), as stocks rose and bond yields fell.
Godwin Emefiele , governor of the CBN announced that the bank would begin market-driven foreign currency trading next week, abandoning its 16-month fixed exchange rate policy.
With a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy.
“To improve the dynamics of the market, we will introduce foreign exchange primary dealers who would be registered by the CBN to deal directly with the bank for large trade sizes on a two-way quote basis,” Emefiele told reporters.
Nigeria’s stock market gained 3 percent following the announcement, while yields on 5 year and 20 year bonds fell.
“This is positive for growth as accessibility to dollars will improve; hence manufacturers can source dollars to import raw material input. I expect growth to steadily improve in the coming quarters, especially from the manufacturing sector,” said Tosin Ojo, head of research at investment firm, Cardinal Stone, in response to questions.
“This new system is more transparent than what we had before (prior to the elimination of two way quote) – hence it will significantly raise the confidence of foreign investors, especially if the auctions go smoothly and backlogs are successfully cleared.”
The CBN said eight to 10 primary dealers would supply the interbank market with dollars, handling minimum volumes of $10 million.
The primary dealers will be allowed to sell back 70 percent of any dollars bought from the Central Bank on the day of purchase. Sales must be backed by a specific customer order to avoid currency speculation, the Central Bank said.
Nigeria’s retail currency operators or bureaux de change will not be able to buy from the interbank market.
The CBN expects to notify selected primary dealers by Friday 17th of June.
Robert Omotunde, acting Head Afrinvest Research said, “We have always been clear about our position on the acceptable exchange rate regime that will eliminate sharp practices and guarantee market efficiency. The solution is a market driven exchange rate mechanism. The first thing for the CBN is to determine if it currently has FX reserves buffer to shoulder huge demand within the system. This thus implies that a market driven exchange rate will even assist the CBN in meeting some of the demands within the system.”
Nigeria has been dealing with the effects of three significant and simultaneous global shocks, which began around the third quarter of 2014, including the over 70 percent drop in the price of crude oil, global growth slowdown and geopolitical tensions along critical trading routes in the world; and normalisation of monetary policy by the United States’ Federal Reserve.
In view of these headwinds, its Foreign Exchange Reserves declined significantly from about $42.8 billion in January 2014 to about $26.7 billion as of 10th June 2016.
In terms of inflows, the CBN foreign exchange earnings have fallen from about $3.2 billion monthly to current levels of below a billion dollars per month.
Razia Khan, chief Africa economist at Standard Chartered Bank, London, regarded the announcement as broadly positive.
Analysts say the CBNs move adds to far-reaching policy shifts in a series of more ‘market friendly’ decisions by the Buhari administration in recent months, including the scrapping of fuel subsidies and reaching a compromise with MTN on a $1.7 billion fine.
“This indicates that reform-oriented officials like Vice President Yemi Osinbajo and Finance Minister Kemi Adeosun (both advocates of exchange rate flexibility) are beginning to make an impact,”Philippe de Pontet Practice Head, Sub-Saharan Africa at Eurasia group said.
Emefiele also said the Central Bank would open a foreign exchange the futures market to ease demand on spot trading, reduce volatility and give businesses the opportunity to hedge risks.
Africa’s biggest economy, which contracted by 0.4 percent in the first quarter, faces its worst crisis in decades after the decline in oil prices and last year’s introduction of a currency peg that prompted a large-scale capital flight.
“We believe these measures are long overdue while some of the innovations introduced to the forex market today will not only ensure liquidity and access to foreign exchange but will also deepen the Nigerian financial market. Without a doubt, the policy will remove uncertainty and lure back the inflow of foreign investments into the Nigerian economy,”Ogho Okiti
CEO of consulting firm, Time Economics, said.
Emefiele assured that Nigeria’s $27 billion foreign reserves were capable of meeting all pent up demand and therefore that there was no need for the market to panic.
To enhance liquidity, the CBN plans to offer long-tenured FX Forwards of between 6-12 month to authorised dealers while unlike before where proceeds of foreign investment flows and remittances go to the CBN, inflows will now be warehoused and sold to Primary Dealers in the market using the daily Inter-Bank Rate.
Furthermore, non-oil exporters are now allowed unfettered access to their FX proceeds, which would be sold in the Inter-bank market.
Proceeds of Foreign Investment Inflows and International Money Transfers would also be purchased by Authorised Dealers at the Daily Inter-Bank Rate; and non-oil exporters.
Bukar Kyari, Chairman, Nigeria Economic Summit Group (NESG), welcomed the CBN move, calling it an “effort to turn Nigeria into an inward looking economy. This is what we need if we want to truly promote growth in local production,” Kyari said after the announcement.