By Emma Ujah, Abuja Bureau Chief
The Central Bank of Nigeria (CBN) Wednesday announced what it termed
the "automatic adjustment mechanism of the exchange rate" in a
flexible foreign exchange regime aimed at reducing the pressure on the
Naira.
CBN has been under immense pressure to devalue the Naira for a while,
which has been resisted by both the monetary and fiscal authorities,
claiming that past devaluations did not benefit the economy- which is
import dependent.
Mr. Emefiele said, "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.
Highlights of the flexible regime
Under the new regime, Governor Enefiele said that the market would
operate as a single market structure through the inter-bank/autonomous
window
Below are the highlights of the new regime:
*The Exchange Rate would be purely market-driven using the
Thomson-Reuters Order Matching System as well as the Conversational
Dealing Book.
*The CBN would participate in the Market through periodic
interventions to either buy or sell FX as the need arises.
*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.
*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.
*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.
*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.
*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
In addition:
*Sale of FX Forwards by Authorized Dealers to end-users must be
trade-backed, with no predetermined spreads;
*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;
*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;
*Proceeds of Foreign Investment Inflows and International Money
Transfers shall be purchased by Authorized Dealers at the Daily
Inter-Bank Rate; and
*Non-oil exporters are now allowed unfettered access to their FX
proceeds, which shall be sold in the Inter-bank market.
Timelines
*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
*Inter-bank trading under the new guidelines will begin on Monday 20th
June 2016; and
*The tenors and rates for the OTC Naira-settled FX Futures will be
announced on Monday, June 27, 2016.
Depleted foreign reserves
The CBN, the governor said, had to take the measures sine the nation
"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."
He blamed the poor foreign exchange receipts on 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.
The CBN boss explained, "the interplay between reduced FX Supply and
rising FX demand accounted for a substantial reduction in our foreign
exchange reserves."
Mr. Emefiele, assured, however, that "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."
He said that his team at the CBN would ensure transparency in the new
regime and that there would be no place for speculators.
His words, "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."
The governor explained that the Primary Dealers would be about eight
or ten and banks with the capacity to go to the market with as much as
$10 million.
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