GUEST POST: SEUN OYAJUMO ON THE NIGERIAN GOVERNMENT’S FX LIBERALIZATION


 

Last week,  the Nigerian Central Bank caved in and liberalized the Nigerian Foreign Exchange Market after more than a year of pegging the Dollar to Naira exchange rate at 198 Naira. This move came as a welcome surprise as the CBN governor gave indication in the last MPC communiqué broadcast that the there would be a two-tier structure, that is a “critical” window for strategically important imports like machinery et al and another market for everyone else.
The drop in crude oil prices precipitated the continuing drop in the Naira’s value as Dollar Proceeds into our foreign reserves from oil sales reduced significantly leading to a reduced ability by the CBN to supply dollars to importers and other end users.  Historically, the CBN has always been “the big guy” in the Nigerian FX market and the largest supplier of FX to end users. The International Oil companies also play a part in this market too by selling their dollar receipts at the Interbank market. Therefore, when the CBN pegged the price of the Dollar at 198 Naira, foreign investors in the Nigeria capital markets(shares and bonds) stayed out as they had no assurance they were receiving the normal(market) value for their investments; and whether they could get their investments back at the same rate when it came time to repatriate their profits.
This issue has affected trade, imports and manufacturing with the Purchasing Managers Index – An indicator of manufacturing activity – declining month on month. The issue has also caused the economy to shrink, and also for inflation to gap higher as cost of imported raw materials and finished goods escalated.
Despite calls by the IMF to liberalize the FX regime and the JP Morgan Emerging Market index exiting Nigeria, the CBN refused to change its position for months, while Nigeria went to the dogs. However the Monetary Policy Committee at its last meeting gave indication of a willingness to take the overdue step of lifting the restrictions on the FX market.
The new policy is a breath of fresh air to importers and manufacturers who have struggled with getting the requisite raw materials for their operations.
The crux of the policy in simple language is as follows:
There shall be one market for FX transactions called the Inter-Bank Foreign Exchange Market.
The CBN can intervene i.e. buy or sell in this market
There will be FX Primary dealers (mostly the biggest banks) who will deal with the CBN on larger trade sizes on a two way basis (that is they will post buy and sell prices at the same time)
There will be Authorised Dealers who will trade with amongst themselves on a two basis just like above
The Authorised Dealers  will trade with other participants (Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users) by offering one way quotes(that is either a buy or sell quote)
Proceeds of Foreign Investments and International Money Transfers will be bought by the Authorised Dealers at this Interbank Market prevailing rate.

To reduce fluctuations in this market, the Authorised Dealers can offer FX futures – that is a person who needs dollars on a definite day in the future can lock in a rate now for that future date.
These FX futures must be backed by trade transactions and or verifiable investments.
Inter-bank funds shall NOT be sold to Bureaux-de-Change
The forty-one (41) items classified as “Not Valid for Foreign Exchange” as detailed before by the CBN will remain inadmissible in the Nigerian FX market.
Trading in this market started on Monday  June 20th
Effectively, what all the above means is that the CBN has floated the Naira and our FX market is now open to all and sundry to participate in for whatever purposes outside of the 41 items “banned” from the FX market. The exchange rate of the dollar to Naira and vice versa will now be purely determined by market forces (demand and supply) and won’t be fixed by the CBN or anyone.
It is important to note though that this floating is not devaluation, it only becomes devaluation if the market sells on Monday above the prior official rate of 198 Naira. When the market opens on Monday, the CBN will probably be the first person selling to take care of the existing backlog before other participants bring in their dollars.
Expectedly, this new policy will bring certainty to our FX regime and give foreign investors the peace of mind to invest in Nigeria either directly or through investment securities like shares, bonds and treasury bills. Nigeria could have saved part of our foreign reserves and avoided the damage done to our economy and people’s businesses. Numerous jobs have been lost to the contraction of our economy as companies stopped operations in the constrained conditions of the economy, banks have sacked thousands as non performing loans have spiked beyond the CBN maximum threshold of 5% and their operating income shrunk.
This episode shows what happens what happens when a government prioritizes political face saving over economic common sense and deleterious effects. This will certainly be a lesson to future generations that not even the government can fight market forces. If you think otherwise, read up on how George Soros shorted the Pound in 1992 and why Britain floated its currency afterwards.

Seun Oyajumo writes from Lagos, Nigeria. He is a qualified legal practitioner and works in Investment banking particularly in the Fixed Income and Currency markets.  He has interests in geo-political economy, history, the arts and technology.

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