The Central Bank of Nigeria said on Wednesday it would begin solely market-driven foreign currency trading next week, thereby abandoning its 16-month peg and setting the stage for the naira to fall sharply. In fact with this policy, it is projected that the naira will exchange to the dollar between 260 and 270.
Nigeria’s apex bank had previously pegged the naira at 197 to the U.S. dollar but the currency trades at about half that on the black market as slump in oil revenues has hammered public finances and foreign currency reserves.
According to Central Bank Governor, Godwin Emefiele, the new trading rules begin on Monday, The change in monetary policy is a “managed float” and puts Nigeria in line with most central banks, including the Bank of England,
A senior central bank official was quoted by Reuters that Nigeria’s central bank has no target for the naira. The latest interbank level will be posted on the central bank’s website daily from Monday, the official said, adding: “The old rate of 197 does not exist anymore.”
Africa’s largest crude exporter, Nigeria, has resisted devaluing its currency for more than a year despite other major oil producers, including Russia, Kazakhstan and Angola, allowing their currencies to fall amid lower crude prices.
The central bank will still be able to inject dollars into the market, giving it some control over the exchange rate within the limit of its foreign reserves which fell to $26.7 billion in June, from $42.8 billion in January 2014.
Emefiele hopes opening up trading will ease severe U.S. dollar shortages caused by a slump in oil revenue.
The conventional scholl of thought is that with a sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy but also lift inflation.
According to Emefiele, “To improve the dynamics of the market, we will introduce foreign exchange primary dealers who would be registered by the CBN (central bank) to deal directly with the bank for large trade sizes on a two-way quote basis.”
Nigeria’s stock market gained 3 percent following the announcement.
The central bank said eight to 10 primary dealers would supply the interbank market with dollars, they will be handling minimum volumes of $10 million.
The central bank also said that 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.
Nigeria’s currency dealers will meet on Thursday to discuss new forex guidelines. Retail currency operators will not be able to buy from the interbank market, meaning dollars will remain in scarce supply for private individuals and small businesses.
Emefiele also said the central bank would open a foreign exchange futures market to ease demand on spot trading, reduce volatility and give businesses the opportunity to hedge risks.
Nigeria, Africa’s largest economy, contracted by 0.4 percent in the first quarter, faces its worst crisis in decades after the drop in oil prices and last year’s disastrous introduction of a currency peg that prompted a large-scale capital flight.
Here is the full text of the CBN Governor’s address on the new Flexible Exchange Rate Policy held on June 15, 2016:
Re-introducing and Operationalizing Nigeria’s Flexible Exchange Rate Market
Governor, Central Bank of Nigeria.
Good afternoon ladies and gentlemen and welcome to the Central Bank of Nigeria (CBN). The Management of the Bank has called this Press Conference in response to one of the commitments contained in the Communiqué of the Monetary Policy Committee (MPC) of 24th May 2016.
Having consulted widely and prepared carefully, the committee of Governors of the CBN is delighted to unveil to relevant stakeholders and the general public, the broad framework and guidelines of the Flexible Exchange Rate Inter-bank Market, which we alluded to at the end of that MPC Meeting. Before I proceed into the details of this new policy, please permit me to provide you with a brief context.
2. We all know by now that Nigeria has been dealing with the effects of three significant and simultaneous global shocks, which began around the third quarter of 2014. These include:
· The over 70 percent drop in the price of crude oil, which contributes the largest share of our Foreign Exchange Reserves;
· Global growth slowdown and geopolitical tensions along critical trading routes in the world; and
· Normalization of Monetary Policy by the United States’ Federal Reserve.
3. In view of these headwinds, the CBN witnessed a significant decline in our Foreign Exchange Reserves from about US$42.8 billion in January 2014 to about US$26.7 billion as of 10th June 2016. In terms of inflows, the Bank’s foreign exchange earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month.
4. Despite these outcomes, the demand for foreign exchange has risen significantly. For example, in 2005 when we had oil prices at about US$50 per barrel for an extended period of time, our average import bill was N148.3 billion per month. In stark contrast, our average import bill for 2015 was about N917.6 billion per month. Unfortunately, the interplay between reduced FX Supply and rising FX demand accounted for a substantial reduction in our foreign exchange reserves.
5. In order to avoid further depletion of the reserves, the CBN took a number of countervailing policy actions, anchored on the prioritization of the most critical needs for foreign exchange as well as maintaining stability in the exchange rate. Having allowed two adjustments from August 2014 to February 2015, we decided to manage the Naira-Dollar Exchange Rate at about N197/US$1 over the last 16 months, and then provide the available but highly limited foreign exchange to meet the following needs:
· Matured Letters of Credit from Commercial Banks
· Importation of Raw Materials, Plants, and Equipment,
· Importation of Petroleum Products, and
· Payments for School Fees, BTA, PTA, and related expenses
6. Over the intervening period, we are happy to note that these policies have yielded some positive developments. In particular, we have managed to stabilize the exchange rate since February 2015, thereby creating certainty for both household and business decisions, and also underpinning the economic growth we recorded in 2015. We have largely eliminated speculators and rent-seekers from the Foreign Exchange Market. Our Reserves, despite having fallen, is still robust and is able to cover about 5 months of Nigeria’s imports as against the international benchmark of 3 months. Furthermore, the domestic production of items restricted from the FX market is picking up nationwide, thereby creating more jobs for many more Nigerians.
7. Despite these positive outcomes, the Central Bank of Nigeria has always maintained that it would continue to monitor situations on the ground and ensure that the Bank’s policies reflect these facts and developments rather than the sentiments of any groups or sectors. It is in light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market. The workings of this market will be consistent with the Bank’s objectives of enhancing efficiency and facilitating a liquid and transparent Foreign Exchange Market.
8. Although the detailed framework and operational guidelines of the market will be released to the public immediately after this Press Briefing, permit me to highlight its key aspects:
a. The market shall operate as a single market structure through the inter-bank/autonomous window;
b. The Exchange Rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book;
c. The CBN would participate in the Market through periodic interventions to either buy or sell FX as the need arises;
d. 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;
e. 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;
f. There shall be no predetermined spread on FX spot transactions executed through the CBN intervention with Primary Dealers, while all FX Spot purchased by Authorized Dealers are transferable in the inter-bank FX Market;
g. The Forty-One (41) items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN Circular shall remain inadmissible in the Nigerian FX market;
h. To enhance liquidity in the market, the CBN may also offer long-tenored FX Forwards of 6 to 12 months or any tenor to Authorized Dealers;
i. Sale of FX Forwards by Authorized Dealers to end-users must be trade-backed, with no predetermined spreads;
j. The CBN shall introduce non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System. This is an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market;
k. The OTC FX Futures shall be in non-standardized amounts and different fixed tenors, which may be sold on any dates thereby ensuring bespoke maturity dates;
l. Proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by Authorized Dealers at the Daily Inter-Bank Rate; and
m. Non-oil exporters are now allowed unfettered access to their FX proceeds, which shall be sold in the Inter-bank market.
9. In terms of timelines, the Management of the Central Bank has agreed as follows:
a. The detailed operational guidelines for the Flexible Foreign Exchange Market will be released immediately after this Press Briefing;
b. The guidelines for the selection and operations of FX Primary Dealers would also be released immediately after this Press Briefing;
c. Selected FX Primary Dealers would be notified by Friday 17th June 2016. All other non-Primary Dealers would remain valid and eligible to participate in the market;
d. Inter-bank trading under the new guidelines will begin on Monday 20th June 2016; and
e. The tenors and rates for the OTC Naira-settled FX Futures will be announced on Monday 27th June 2016.
10. In closing, let me note that the Central Bank is strongly determined to make this market as transparent, liquid, and efficient as possible. Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders. The CBN expects all authorized dealers particularly 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. Permit me to emphasize that any attempt to breach any aspect of this new framework will be heavily sanctioned by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing license of an offending Authorized dealer.
11. I therefore urge market participants to assist us in ensuring that this new system enables the CBN to pursue its mandate in a more effective and efficient manner, which guarantees preservation of our scarce commonwealth, stability of our financial system, and growth of our economy to the benefit of all Nigerians.
Thank you.
