The Central Bank of Nigeria (CBN)-led reforms in the forex market has raised the hope of dealers and market players on the possibility of growing the foreign reserves to $60 billion by year end.
Domestic and foreign investors now see reasons for committing more capital to the economy, boosting the foreign reserves and supporting exchange rate stability. The fallouts are expected to enhance the approval ratings of financial sector regulator in the eyes of the investment community
The floating of the naira, which officially ended decades of multiple exchange rate regime has been described by the domestic and global investment community as courageous and long overdue.
They believe it one of the very many steps needed to transform the economy and attracting foreign capital that will not only strengthen the naira, but push the foreign reserves to $60 billion by year end.
For many forex dealers and financial markets players, the exchange rate unification project, which saw the Central Bank of Nigeria (CBN) collapse all exchange rates- the International Air Transport Association (IATA) rate, parallel market rate, Interbank Exchange Rate and Bureaux De Change (BDC) rate were collapsed into the Investors & Exporters (I&E) window, was plausible.
The policy shift entailed that all dollar applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, and SMEs are now processed through the I&E window- where rates are determined by market forces.
The policy significantly narrowed the premium between official and parallel market rates, which is first major consideration for foreign direct investment inflows.
In a circular to authorized dealers signed by CBN Director, Financial Markets, Angela Sere-Ejembi, said all exchange rate segmentation are abolished with immediate effect.
She said all segments are now collapsed into the Investors and Exporters (I&E) window. Applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, and SMEs would continue to be processed through the I&E window.
She said the operational changes to the foreign exchange market also include the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.
“Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window,” she said.
According to the circular, all operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places.
“Proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC futures Limits on overbought positions shall be zero. Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP). Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades. The operational hours of trades shall be from 9am to 4pm, Nigeria time,” the circular said.
Managing Director, Afrinvest West Africa limited, Ike Chioke, said the forex reforms by the CBN has raised hope on sustainable economic development.
He said the spike in forex rate at the parallel market will be short-lived as more foreign investors pump dollars to the economy.
He said naira will face pressures at the parallel market but that will be for a short time. He said the bigger picture is that more foreign direct investments will find their way into the economy. “The forex reforms has rekindled hope of domestic and foreign investors in the economy, and we expect it to pay out positively on the naira and foreign reserves in the long run,” he said.
Managing Director of Afrinvest Consulting, Abiodun Keripe, said the reforms were courageous, and were previously thought impossible.
He said the reforms in the forex market have opened the possibility of Nigeria growing the foreign reserves from about $36 billion to $60 billion by year end.
He said achieving the target will require increased oil production, boost in diaspora remittances, sustenance of tax and oil subsidy reforms by President Bola Ahmed Tinubu administration.
Keripe said implementing these reforms will also strengthen the naira from current status to around N550/ N600/$.
President, Association of Bureaux De Change Operators of Nigeria (ABCON) Alhaji Aminu Gwadabe, said the removal of rate cap at the I&E Forex Window was to allow for a true market clearance rate which has been the agitation of several stakeholders in the economy.
He said the move will harness and increase various sources of supply of Greenback into the economy like foreign portfolio investment, Foreign Direct Investment, Diaspora remittances, export proceeds, among others.
The new directive in my opinion, is to checkmate various illegal economic behaviors like rent seeking, currency substitution, forex holding positions and frivolous demand in the market.
He said forex dealers are now awaiting official rule of engagement to fully explore the benefits of the polciy.
Gwadabe predicted initial panic and mild spike in the market that will push levels up but that will be short lived.
“Secondly in the medium term, we will begin to see our sources of dollars inflow increasing in the market to provide the needed liquidity in the market for rates stabilization. Being a definite free market structure as supplies increase the rates we definitely come to settle down at a level of N600/650 to the dollar with somehow a very little margin in both market,” he said.
He said the challenge of liquidity injection into the market should be resolved, with bureaux de change operators expected to play major role.
“In solving this Problem, The BDCs are primarily licensed for to formalize them, deepen the market liquidity. The BDCs also provide the role of reducing spreads between buy and sell offer rates which help the stability of the naira. I therefore advise the Acting CBN Governor to leverage on BDCs on Disapora remittances that is huge, cheap and constant to harness, achieve their desired objectives of market liquidity. They should continue to demonopolize the market by making BDCs the exclusives Àgent of pickup agencies of Diaspora remittances proceeds,” he said.
Also speaking, former Executive Director, Keystone Bank, Richard Obire, said the apex bank should promote transparency in the forex market through the exchange rate unification move.
He said eradicating multiple exchange rate will bring about increased dollar supply, and exchange rate stability.
Local banks are already being told that going forward, the naira’s exchange rate against the dollar will be determined through supply and demand rather than by the central bank, another senior banking official said. The bankers had said they were expecting a strong depreciation of the naira at the official spot window.
Applauding the forex reforms, traders at Balogun Market, Alaba International Market, Trade Fair and Aba Market said exchange rate unification has ushered in more competition, and level playing field for imported products.
An importer at the Balogun Market, Lagos, Bartholomew Okafor, said the apex bank’s policy has brought a level playing field to the market.
He claimed that 100 per cent of his dollars he used in importing foreign fabrics are sourced from the black market.
“We have only seen marginal depreciation at the black market, which is not strong enough to significantly change the prices of our goods. We expect the naira to gain and recover to position of strength in the coming months,” he said.
Continuing, he said the advantage people that source dollars from the official market have over others is no longer applicable.
“Everybody will get thee dollar at almost same rate. That humongous gap between the official and parallel market is gone for the sake of fair trade,” he said.
Other analysts said that said those expecting major spike in inflation figures will not see that happening, because a large part of the dollars in the economy is souped from the black market.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said it is expected that the ongoing reforms will begin to crystallise in the coming months.
“Although the exchange rate seems to be volatile at the I&E FX window, it is expected that it will become more stable in the coming months while converging to the parallel market rate.”
“However, external reserves will remain constrained as oil prices sustain their bearish outlook. Headline inflation is expected to rise in June due to the impact of fuel subsidy removal on transport and food prices. As inflation continues to trend upward, the Monetary Policy Committee (MPC) is likely to hike interest rates at its next meeting in July.
Martins Maduka who trades at the Trade Fair market, the also welcomed the new policy. He said whereas Nigerians may be expecting inflation because of the new policy, it may have the opposite effect, saying that inflation will drop over time.
The International Monetary Fund (IMF) also expressed support for the foreign exchange rates unification policy.
It pledged to give the government the required encouragement to ensure the success of the foreign exchange reforms.
The IMF, in a terse statement in Abuja by its Resident Representative in Nigeria, Ari Aisen, said it “ greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations.
“We stand ready to support the new administration in its implementation of FX reforms.”
Fiscal Policy Partner and Africa Tax Leader at PwC, Taiwo Oyedele, said that with the I&E Window policy, government’s revenue would rise in naira terms resulting in a higher tax, revenue to Gross Domestic Product (GDP) ratio. It will also lead to possible reduction in budget deficit and some cost savings for government.
“With the Nigerian naira now exchanging in the official forex market at market determined rates, a significant market distortion has been removed. Expectedly, impact on diaspora remittances would be marginal, the capital market will benefit as it is likely to appreciate further as foreign investors take position, there should be negligible impact on the general prices of goods and services as products already factored in parallel market rates to a large extent. Overall, this is a positive move,” he said.
Continuing, he said the government needs to manage the dynamics to restore confidence adding that the backlog of forex demands needs to be addressed and government should be ready to supply forex to stabilise the exchange rate in the short term.
Oyedele added: “Government also needs to relax capital control and administrative bottlenecks including unbanning the list of items prohibited for forex (and complement with higher import duties), remove the need for certificate of capital importation among others to prevent the parallel market rate from simply moving further away from the official market rate. Stop the demand for certain taxes and levies in foreign currency, it creates unnecessary forex demand without adding to supply”.
CEO of Moniepoint, Tosin Eniolorunda, said the CBN’s decision to float the naira is a clear step in the right direction for our economy, ensuring investor confidence continues to grow.
Applauding the ongoing reforms, he said: “The decision is good for business, jobs and growth. It will help Nigeria’s brilliant entrepreneurs to do business globally and attract foreign investment. It will also help reduce inflation, leaving more money in people’s pockets”.
