The Central Bank Governor has just announced a full float of the Naira in a press conference in Abuja. The CBN Governor informed a stunned audience that the exchange rate will be market determined and that the CBN will also participate in the market occasionally. The CBN also maintained that the 41 items banned last year for access to forex for imports remained banned. The CBN has also appointed primary dealers for the first time which is expected to help boost FX liquidity in the market.
In a remarkable turn on events for a CBN Governor and Government that have for months held tightly to an artificial exchange rate, the CBN Governor also revealed that we will be operating a single market suggesting that we will no longer have two windows.
The CBN also introduced a two way quote which basically means that the market will act like the stock market where buyers and sellers will state price and quantity they are willing to sell.
The CBN Governor also confirmed that all the “pent-up” demand awaiting to be filled (for example airlines looking to repatriate their dollars out of Nigeria) will be met at the interbank market but advised caution for buyers looking to front load orders. In what was quite a remarkable press conference, he clearly stated that the CBN has enough reserves to meet demand and is willing to put its reserves on the line.
The market will also include financial products such as futures where businesses who need dollars in the near distant future can now hedge by buying at a price today but get the dollars delivered when they actually need it.
Implications
- As per the new price of the Naira, the CBN Governor mentioned that the price will be known when the market opens officially on Monday.
- The implication of this could be wide-ranging and we will know more as more details emerge after the press briefing. However, we can only but conclude that the end of the black market is near as anyone and everyone can now buy dollars at any bank or with authorized dealers at a price that is market determined.
- Nairametrics had reported severally that the black market rates might drop if the CBN announces a float as investors and businesses who refused to import dollars into Nigeria can not bring in their forex at a price they believe is market determined. This might take some time at the worst but we believe the market will be flooded with liquidity in due course. Indeed we anticipate some volatility as the market takes shape and tracks how liquid the market will be.
- In other countries where a full float was launched, the value of the currency of the home country did plummet woefully before it found its level. However, the rates between the interbank market and the parallel market did narrow which we expect will also replicate in Nigeria.
- The CBN Governor did not dwell on the controls currently in place such as limits to withdrawals of dollars from your bank domiciliary accounts or spending limits when abroad. However, we believe these limits will be removed in due time as the market becomes more liquid.
- The CBN in its recently released policy details also revealed that the BDC’s will not be able to buy dollars from the interbank marker essentially throwing them under the bus.
- What this also means is that if you own cash dollars then you have a choice of either depositing it in a bank or selling to Bureaux De Change (BDCs). If you want to buy without filling in all the requirements banks may ask you for such as your passport, then it’s probably the BDC you want to go to.
- Bureaux De Change is officially a cash and carry market where major transactions can no longer take place. The incentives for banks to round trip and sell to BDCs is effectively removed since the interbank is market driven and more liquid.
- The CBN also said applicable exchange rate for the purpose of import duty payments shall be the daily inter-bank FX closing rate as published on the CBN website. This means import duties will now be paid based on the closing exchange rate for the day at the interbank market. These rates can be obtained at the website of the FMDQ.
- Transactions involving purchases of things like airline tickets, visa renewals, master card/visa transactions for online purchases abroad, school fees, medical tourism etc. will also now be paid using the interbank rate at the close of business every day.
- So essentially, the price you pay for tickets, visas etc. can vary from day to day depending on the exchange rate for that particular day (except the CBN agrees with the merchant to fix a spot price).
- The CBN folks, will no longer determine how much you pay for FX. That power is now in the hands of the market.
- Even if the parallel market still exist, the interbank market will at worst mirror that price eliminating a price disparity that allows arbitrage to thrive.
This article further explains this policy in clearer details. Highlights of the press briefing and full guidelines of the policy below;
Key highlights of the press briefing.
- Market moving to single market through interbank via a Reuters / FMDQ order matching system with 10 primary dealers (2 way quote mechanism) and other secondary dealers
- Primary dealers will operate the interbank market. CBN may intervene from time to time
- Proceeds of FDI shall be purchased by authorised dealers at the daily interbank rates
- Non-oil exporters are allowed unfettered access to export proceeds via the interbank rates
- 41 items formerly constrained by CBN will still not be eligible for trade on interbank
- To enhance liquidity, CBN may offer long dated 6 – 12 months forwards to authorised dealers. Forwards must be traded backed with no authorised spreads
- New product : Now authorized NGN futures on the FMDQ OTC – which will allow non-standardised amounts, no fixed dates or tenors. Will allow businesses to hedge. Futures will be NGN settled.
- CBN says they have enough liquidity to play in the market (it surpasses pent-up demand)
Detailed Guidelines to be released
- The new guidelines for FX dealers and market structure will be circulated after the meeting.
- Selected primary dealers will be notified by the 17th of June. Primary dealers must be able to trade sizes of at least $10m
- Interbank trading will start on Monday the 20th of June
- Tenors / rates on NGN futures will be announced on 27th of June
Download the Policy
