Flexible Exchange Rate Policy; Frequently Asked Questions.

 

A new dawn in Nigeria’s exchange rate policy was ushered in on Monday June 20th by the Central Bank of Nigeria. The new policy is expected to enable an exchange rate that will be determined by the forces of demand and supply.

 

We have covered this subject in detail at Nairametrics by featuring quality articles that help our readers understand better. However, we decided to dedicate a page to frequently asked questions that we know small businesses and individuals may wish to have answers for. The page will be updated frequently as things become clearer. We will also include new questions and suggested answers to ensure that our readers remain informed.

 

What do they mean when they say “a currency is floating?”

 

The term “floating” in exchange rate context refers to the exchange rate of a country that is not fixed but “floats” to the direction of demand and supply. If demand is high and supply is low, the exchange rate floats higher. When demand is low and supply is high, the exchange rate floats lower. When demand and supply are nearly equal we have an exchange rate balance or equilibrium.

 

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Difference between floating a currency and devaluation

 

A devaluation can also occur in an interbank market when the home currency depreciates significantly against the dollar or any other benchmarked currency. In Nigeria and most developing countries, devaluation is more synonymous contextually with the Central Bank depreciating the currency by fiat. For example, when the CBN moved the exchange rate from N165 to N197 it was a devaluation.

 

 

Will we still have two exchange rates? If yes, which one do I rely on for transactions

 

Whilst the parallel market rate has never been an official rate, it is still very much referenced as the closest to an ideal market determined rate. The interbank market rate and the parallel market rates will therefore remain for some time. The parallel market rates will most be cash based and will serve the retail end of the market for buyers and sellers of forex who do not wish to transact through banks. However, we expect that the difference between both rates will be slim (perhaps plus or minus 5% max).

 

Will this new policy eliminate black market operators and do I still need to track parallel market rates?

 

Parallel markets will still remain, however we believe their influence will be mostly minimal and not like we have them today. As such, tracking that rate is still important provided that is where you still buy and sell dollars. As our forex markets develop, the CBN will introduce structures that will cater for the very retail end of the market. For example, some retail FX operators can deal only in online transactions, others purely cash while some card based transactions.

 

If I want to renew my Visa on Monday or pay for my import duties, at what rate will I pay?

 

Let’s take them one by one. Visas fees in the past are based on the official exchange rate set by the CBN. If a Visa fee is $200 then you pay about N39,400 (using N197). Now that rates are determined by market forces, Embassies are no longer compelled to use the official rate of N197. They will likely use the interbank rate or a monthly average of the exchange rate.

 

For tickets, airlines also quote tickets prices in forex but convert them to Naira using the official exchange rate. Now that the exchange rate is now market determined, we expect that ticket prices will fluctuate depending on how the exchange rate swings. Ticket prices will likely rise when the market takes effect.

Import duties are also paid based on the free on board value of goods being imported. That is typically on forex and need to be converted to dollars. Again, that too used to be based on the official exchange rate of N197. Going forward, we expect it to be determined by the interbank rate.

 

What will be the roles of BDC’s? Will we still need them?

BDC’s are expected to eventually play a crucial role in this new exchange rate policy. They will handle the retail end of the market where the ordinary Nigerians goes to buy and sell forex. Their roles will be similar to what the likes of Travelex do in Europe.

 

How do I buy or sell forex going forward? Is it still possible to buy forex in cash?

 

You will still be able to buy forex officially by bidding through your bank. Your Form M’s and other documents used by importers to pay for goods abroad will be based on the interbank market rate. If what you want is a cash transaction, then you’d have to rely on the parallel market at least for now.

 

Is there a limit to how high or low the price can get to?

 

Before now, the CBN can determine how high or low they want the exchange rate to trade. With this new exchange rate policy, there is no limit to how high or low the interbank market price can go. It all depends on the forces of demand and supply. This in effect means that we can see the Naira trading at N400 or N500 or N200 or N250 it all depends on the forces on demand and supply.

 

Will there always be dollars available for me to buy whenever I need them?

 

One of the major issues we had with the previous fixed exchange rate policy was scarcity. Because of the scarcity of forex, people tended towards front loading purchase even if they really did not need the money immediately. Some even bought just to hoard and hope that prices will rise again. Whilst, scarcity can’t be ruled out completely we believe you will always have access to buy dollars provided you meet regulatory or the banks criteria. The only difference is that the price could be high if supply is limited and low if supply is readily available.

 

What of other needs such as school fees, medical tourism etc. how do I pay for them?

 

All qualified forex transactions such as school fees, medical tourism, Personal travel allowance etc. will be paid via your commercial banks using the interbank rates. We believe your banks will still be able to sell to you whenever you need it.

 

How do I pay for other expenses such as buying things online?

 

You can still pay for transactions via your authorized debit cards. However, banks can still impose exchange controls on how much you can spend periodically. We believe some of those controls will still remain, however it will loosen as the market picks up over time.

 

When I earn money in dollars online, at what rate will it be converted to?

 

We believe the conversion rate will be the interbank rates except if the you wish to withdraw the money from the bank. Withdrawing forex in cash from your bank account still depends on the exchange controls imposed by your bank.

 

Is there still a restriction on transfer of forex out of the country?

 

Again, retail transactions such as transferring money to a loved one abroad will still depend on the exchange controls currently in place. These controls to the best of our knowledge hasn’t been changed by the CBN however we expect them to be loosened. Exchange controls currently limit your ability to make transfers.

 

If I have dollars in my domiciliary account, can I withdraw it as cash?

 

This also depends on the current exchange controls in place by your bank. Currently, there are restrictions on withdrawals and depositing of forex into your domiciliary accounts. We expect some of these controls to be relaxed in the coming weeks.

 

What major roles will FMDQ play in this new market?

 

The CBN Governor informed everyone that the FMDQ will be the market platform where the interbank market will be traded. As such, all trades will be through the FMDQ and will also be the platform for confirming daily closing prices.

 

Can I trade forex via the FMDQ? If yes, how?

 

Currently, the FMDQ platform only caters for wholesale transactions and not retail. For local retail investors looking to play in this new forex market, you will have to wait till the market is open for you.

 

 

What is FMDQ

 

The FMDQ is an acronym for the Financial Market Dealers Quotation. According to their website, the FMDQ concept was promoted by the Financial Markets Dealers Association (FMDA) in 2009 and sponsored in 2010 by the Bankers’ Committee. It is basically a market where over the counter trades on treasury bills, bonds and now forex are made.

 

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4 COMMENTS

  1. ‘What do they mean when they say “a currency is floating?”’

    Errm. Sorry oh but wasn’t the exchange rate floating before. Like since December last year, its been changing drastically day to day. Does it mean that even at the time, different exchange rates were being fixed everyday

    Sorry, am not quite familiar with the business world(More like a business dummy). I’d love to be explained to in layman terms.

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