Why We Back The Central Bank Of Nigeria Flexible Foreign Exchange Policy
The attention of Integrity Youth Alliance has been drawn to recent attacks on the Central Bank of Nigeria’s flexible foreign exchange policy.
It will be recalled that the Central Bank of Nigeria on Wednesday, June 15, 2016 formally unveiled the flexible foreign exchange policy that would allow the foreign exchange interbank trading window to be driven purely by market forces.
The new policy effectively removes controls on the Naira, allowing increased Dollar supply that would help strengthen the country’s weak economy.
It is on record that Nigeria’s foreign exchange reserves declined from about $42.8 billion in January 2014 to about $26.7 billion as of June 10, 2016, with average monthly inflows falling from about $3.2 billion to current levels below a billion dollars per month.
Despite these outcomes, the demand for foreign exchange rose significantly, from an average import bill of N148.3 billion per month in 2005, to about N917.6 billion per month in 2015.
To avoid further depletion of the reserves, the Central Bank of Nigeria opted to adopt policy actions to prioritize the most critical needs for foreign exchange as well as maintaining stability in the exchange rate.
The areas of priority included honouring matured letters of credit from commercial banks, importation of raw materials, plants, and equipment, importation of petroleum products and payments of school fees and related expenses.
The Central Bank of Nigeria was able to stabilize the exchange rate since February 2015, and eliminated speculators and rent-seekers from the foreign exchange market.
It was time 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 the market would be consistent with the Central Bank of Nigeria’s objectives of enhancing efficiency and facilitating a liquid and transparent foreign exchange market.
It is in the highlights of the above that we want Nigerians to know the framework of the FOREX which include but not limited to:
- The market shall operate as a single market structure through the inter-bank/autonomous window;
- The Exchange Rate will be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book;
- The Central Bank of Nigeria will participate in the Market through periodic interventions to either buy or sell FX as the need arises;
- To improve the dynamics of the market, Central Bank of Nigeria will introduce FX Primary Dealers (FXPD) who would be registered by the Central Bank of Nigeria 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;
- 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 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous Central Bank of Nigeria Circular shall remain inadmissible in the Nigerian FX market;
- To enhance liquidity in the market, the Central Bank of Nigeria may also offer long-tenored FX Forwards of 6 to 12 months or any tenor to Authorized Dealers;
- Sale of FX Forwards by Authorized Dealers to end-users must be trade-backed, with no predetermined spreads;
- The Central Bank of Nigeria shall introduce non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System.
- 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.
The FOREX policy by the Central Bank of Nigeria is a measure that would promote economic growth, so we see it as a welcome development. The bold step by the Central Bank of Nigeria to re-engineer the institutional framework of foreign exchange transactions in the country will engender the injection of more local and foreign investments into the country.
The new currency policy is a bold reflection of the fiscal policy of the Buhari administration which seeks to make the Naira a competitive currency in international trade.
It is our believe that this new policy will cleanse the Aegean stable whereby FOREX trading in the country was loosely regulated; while the Central Bank of Nigeria looked away when officials of government and their cronies became overnight foreign exchange traders.
Integrity Youth Alliance