Following a year of Nigeria’s President Muhammadu Buhari insisting against better advice to liberalize the naira and permit market forces to determine its value, the president has finally approved that CBN relax the rules on forex in the country. This means an instant devaluation of the country’s currency, the naira.
The president had Monday, hinted, to this decision with a cliche-filled editorial in the US news magazine, Wall Street Journal in which he called for free markets.
Mr. Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), on Wednesday, June 15 unfolded a new forex exchange market regime.
Here are the highlights of his address followed by an infographic on how this monetary policy direction would affect Nigerians.
1. Foreign reserves fell by 60% in 30 months: The fall in oil revenue has led to a drastic fall in foreign reserves, from about US$42.8 billion in January 2014 to about US$26.7 billion as of June 10, 2016.
2. Monthly FX earnings now less than $1 billion: CBN’s foreign exchange earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month during the same period. This is attributable to low oil prices and attacks on oil installations, which reduced crude export.
3. Some needs still met: Despite the shortage of forex, CBN managed to meet some of its obligations regarding the following — matured LCs from commercial banks; importation of raw materials, plants, and equipment; importation of petroleum products; and payments for school fees, BTA, PTA, and related expenses.
4. Our reserves can still meet import needs: Despite having fallen, the FX reserve is still robust and able to cover about five months of Nigeria’s imports as against the international benchmark of three months. Domestic production of items restricted from the FX market is picking up nationwide, Emefiele said.
5. There will be only one FX market: The “new” market shall operate as a single market structure through the inter-bank/autonomous window. The CBN would participate in the market through periodic interventions to either buy or sell FX as the need arises. In other words, the CBN rate of $197 is gone for good.
6. The exchange rate would be purely market-driven: This will be done through the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.
7. There will be registered primary dealers: To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis. These Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines, which would also be released immediately after this Press Briefing.
8. The “41 items” remain excluded: The 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN circular shall remain inadmissible in the Nigerian FX market. Therefore, they would source from parallel market.
9. The CBN shall introduce non-deliverable OTCs: The over-the-counter (OTC) naira-settled futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System, will be introduced. This is an entirely new product in the Nigerian FX market, which Emefiele says would help moderate volatility in the exchange rate by moving non-urgent FX demand from the spot to the futures market;
10. Authorised dealers to purchase “repatriations”: Proceeds of foreign investment inflows and international money transfers shall be purchased by authorised dealers at the Daily Inter-Bank Rate; and non-oil exporters are now allowed unfettered access to their FX proceeds, which shall be sold in the inter-bank market.
11. FX dealers to know themselves by Friday. The selected FX primary dealers will be notified by Friday June 17, 2016, according to Emefiele. 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.