Ifeanyi Onuba, Stanley Opara and Oyetunji Abioye
After weeks of consultation with stakeholders in the financial services sector, the Central Bank of Nigeria on Wednesday finally released the flexible foreign exchange guidelines.
The CBN Governor, Mr. Godwin Emefiele, who announced the details of the policy while briefing journalists at the apex bank’s headquarters in Abuja, explained that interbank trading under the new guidelines would begin on Monday.
Giving some of the highlights of the new policy, the governor said based on the guidelines, the value of the naira against other currencies would be market-driven.
In reaction to the announcement of the guidelines, the Nigerian Stock Exchange All-Share Index gained 3.17 per cent on Wednesday
The development boosted the NSE market capitalisation by N295bn as the value rose to N9.579tn from Tuesday’s close of N9.284tn, while the NSE ASI hit 27,891.96 basis points from 27,034.05 basis points.
Aggregate of 588.427 million shares worth N3.477bn were traded in 5,088 deals at the close of trading on the floor of the Exchange on Wednesday.
To implement the new forex policy, the CBN governor said the apex bank would on Friday appoint primary and secondary dealers, adding that their dealership level would be categorised based on the volume of transaction that they could handle.
He said based on the assessment of the CBN, the number of primary dealers would be between eight and 10 financial institutions with a minimum transaction volume of $10m.
Emefiele said, “We have decided that the CBN will deal primarily with what we call the foreign exchange primary dealers. We will have non-primary dealers and primary dealers. The guidelines for qualification for being a foreign exchange primary dealer will be on our website.
“There are a number of qualifications, either the size of the bank, or the size of forex transactions it had done before, the level of liquidity, the extent to which those banks have complied with the CBN guidelines and regulations in the past, and their level of preparedness in terms of being able to provide all the soft and hardware that is needed to operate in a very transparent manner.”
The governor also said the market would operate as a single structure through the inter-bank/autonomous window; while the exchange rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.
The CBN, according to him, will also participate in the foreign exchange market through periodic interventions to either buy or sell foreign exchange as the need arises.
Similarly, the governor said there would be no predetermined spread on foreign exchange spot transactions executed through the CBN intervention with the primary dealers, while all foreign exchange spots purchased by authorised dealers would be transferable in the interbank foreign exchange market.
On the 41 items, which were classified as ‘Not valid for foreign exchange’ as detailed in a previous CBN circular issued last year, Emefiele explained that they would remain inadmissible in the foreign exchange market.
In order to enhance liquidity in the market, he said the CBN would also offer long-tenured foreign exchange forwards of six to 12 months or any tenure to authorised dealers.
The governor said with the new policy, the sale of foreign exchange forwards by authorised dealers to end-users must be trade-backed, with no predetermined spreads.
In a bid to reduce the speculative demand for foreign exchange for future transactions, the CBN boss said the apex bank would introduce what he described as non-deliverable over-the-counter naira-settled futures.
He explained that the naira-settled futures was an entirely new product in the Nigerian foreign exchange market, which would help moderate volatility in the exchange rate by moving non-urgent foreign exchange demand from the spot to the futures market.
The over-the-counter foreign exchange futures, according to him, will be in non-standardised amounts and different fixed tenors to be sold on any date.
He also said proceeds of foreign investment inflows and international money transfers would be purchased by the authorised dealers at the daily inter-bank rate; and that non-oil exporters would be allowed unfettered access to their foreign exchange proceeds, which would be sold in the interbank market.
In terms of timelines for the policy, the CBN governor said, the management of the central bank had agreed that the selected foreign exchange primary dealers would be notified by Friday, noting that other non-primary dealers would remain valid and eligible to participate in the market.
Explaining what would happen to those people that had matured letters of credit, the CBN governor said the backlog of the transactions would be taken to the market for clearance.
Emefiele said the apex bank was strongly determined to make the market as transparent, liquid, and efficient as possible, adding that it would not tolerate unscrupulous behaviours.
He added, “We will neither tolerate unscrupulous behaviours nor hesitate to bring serious sanctions on offenders. The CBN expects all authorised dealers 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.”
He emphasised that any attempt to breach any aspect of the new framework would be heavily sanctioned by the CBN and this might result in the suspension or withdrawal of the foreign exchange dealing licence of any offending authorised dealer.
The naira closed at 367 against the dollar at the parallel market on Wednesday, hours after the CBN unveiled its flexible exchange rate policy. The local currency had closed at the same rate against the greenback on Tuesday.
The National President, Association of Bureau De Change Operators, Alhaji Aminu Gwadabe, said the policy had yet to have effects on the exchange rate at the parallel market.
Analysts, who spoke to one of our correspondents, commended the CBN for the new policy, saying it would bring down prices and eliminate market distortions
“It is a good policy; it will eliminate market distortions and bring down prices,” the Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said. He added, “However, it is not a silver bullet; there is still a lot of work to be done.”
The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chuwku, who backed the policy framework, said it would enhance price stability.
“It was most expected though coming late; it is better than nothing. It will lead to inflow of Foreign Direct Investment and remittances. This shows we are preparing the economy for diversification,” he stated.
A Professor of Economics at the Olabisi Onabanjo University, Sherifdeen Tella, said, “I don’t think there is anything wrong with the policy. However, there is still a need for the CBN to intervene in the market at some point. We cannot leave everything to the market.
“Therefore, we still need more restrictions on importation in order to preserve the reserves. We should not just buy the idea of free market that will allow just anything to come into the country. Even economies like Japan and the rest still do this.”