Implications Of CBN’s New Forex Policy

Godwin Emefiele, CBN Governor

Godwin Emefiele, CBN Governor

For operators and analysts in the financial world, the step by the apex bank to free up the market is one in the right direction as it will not only converge rate but also remove arbitrage opportunities and artificial demand from the market.

The new policy, which also brings in the futures market, according to traders and analysts, is also expected to increase the inflow of foreign direct investment (FDI) as well as portfolio investments into the country.

Head of Research at Sterling Capital Ltd, Sewa Wusu, noted that while the parallel market will still exist, the new policy will remove “arbitrage opportunity” in the market.

He also noted that “the true value of naira exchange rate vis a vis the dollar will be determined on that market. And that is very good enough because, before now, we didn’t know the true value of the naira.

“What we were seeing was the parallel market or black market rate but now it will be the official standpoint view, which is market determined by the CBN through the interbank window. Market-driven means the forces of demand and supply will intervene. That will fizzle out arbitrage opportunities and allow rates to converge at that interbank window, which is fair enough. What it means is that people can now see the true reflective rate of the naira and they can determine that to plan for their businesses.”

On the futures end of the forex market, Wusu said it will allow for proper planning by companies.

“With that platform, most end users can originate deals for the future and it will be flexible enough that they can know the exact rate at which dollar/naira rate will be at the time they need it. It will help end users, particularly those that do volumes, to hedge their trade for the future transactions.”

On his part, Robert Olatunde, of Afrinvest, commended the apex bank’s move, saying the futures market being introduced will ensure that demand that are not immediate can be off-loaded through the futures market “and that takes out the artificial demand that are not immediate. What is good is that the CBN has standardised it and they will provide guarantee.”

He, however, expressed concern at the retention of restrictions on the 41 items banned from accessing the official foreign exchange market, saying, it might still create some form of market distortion.

“In any case, what they have done now is just to bring in some respite into the market,” he said.

Bureau de change operators are, however, not too happy at the policy as the apex bank had been silent on their issue. There had been no mention of BDCs in his speech.

President of the Association of Bureau De Change Operators of Nigeria (ABCON) Aminu Gwadabe, told LEADERSHIP yesterday that the decision of the apex bank “is not a fair relationship” as it “will favour a few”.

According to him, licensing 10 primary market dealers for an import dependent country with a population of over 180 million people is not a fair representation. He, however, noted that the BDCs will continue to engage the apex bank on the way forward.

On his part,  the managing director/head, Africa Macro, Global Research, Standard Chartered Bank, London, Razia Khan, asserted that rising price pressures were likely to be instrumental in the authorities’ change of stance on forex policy.

He said that Nigeria’s fixed exchange rate regime had merely pushed activity to the parallel market, which is prone to overshooting, less susceptible to formal policy tightening, and likely played a significant role in exacerbating current price pressures.

“The challenge for the authorities is how to go about normalising the forex regime, and more broadly, activity – in their bid to resolve fuel and other supply bottlenecks that have constrained growth while driving inflation higher.

Given where inflation already is, there will be a need for gradualism.  However, in our view, any moves towards meaningful forex flexibility will need to be supported by tightening, in order to restore some degree of credibility to policy.  This may well have implications for the timing of any announcement on currency flexibility.”



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