Reports reaching Nairametrics suggest that the latest forex policy announced by the CBN may be a major step towards floating the Naira. The CBN has been hesitant to float the exchange rate in part too scared to upset the President, who hates to hear the word devaluation. The CBN, like other government agencies is also fixated with a control and hold policy that ensures market forces continued to be avoided from determining the price of goods and services deemed ‘sensitive’ by the government.

Unfortunately, it appears that the Forex situation is one that they can no longer contain. A free float of the naira is nearly inevitable and it is only a matter of time before it materializes. The latest Policy pronouncement by the CBN left some clues required to allow us jump into this conclusion.

  • The first sign was the CBN confirming that “All banks would receive amounts commensurate with their demand per week.” We interpret this to mean that, there will no longer be a cap on how much FX banks can buy from the CBN. Everything will not be determined by the demand from the primary market and the likely supply available from the CBN
  • The CBN also used the phrase “competitive exchange rates” in imploring banks to settle FX demands from their customers. This suggests that bank are being encouraged to sell rates at market determined prices even though they still forced a 20% margin to the interbank rates.
  • The clearest indication that this was a likely step towards a market driven forex regime was its statement about its plans to increase efficiency of the FX market.
  • Firstly it claimed that it will “clear all the unfilled orders in the interbank FX market”
  • It also said that it will no longer impose allocation/utilization rules on commercial banks, which suggest that the 60/40 rule has been abandoned
  • It also said it was planning to  “Implement an effective intervention programme to support the inter-bank market to ensure adequate liquidity necessary to deliver an efficient FX market.” That was perhaps the clearest indication yet.
  • It also said it will advise “FMDQ to activate its FX Order-Book systems as soon as possible and also accelerate the on-boarding of FX clients on the FX Relationship Systems to ensure total transparency of the FX market.” Industry sources inform us that this is another clear step towards a full float of the naira.
  • Though this was not mentioned in the CBN’s statement, we also understand that the CBN may first introduce what economist call a “crawling Peg” exchange rate system.
  •  Unfortunately, this system hardly worked in countries that implemented it as it is very vulnerable to speculations.

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