It is a now a matter for the records that on June 15, 2016 that the Governor of the Central Bank finally rolled out the much talked about, much anticipated details on the Nigeria’s flexible foreign exchange market. This was exactly 22days following the Monetary Policy Committee meeting which recommended the introduction of the new approach to the Central Bank in response to the continued lacklustre growth performance of the Nigeria economy which for the first time in many years witnessed negative growth in the first quarter of the year 2016 with clear distinct possibility of similar performance in the subsequent quarter which would clearly signpost the onset of recession in the economy.
It was generally felt that the contractions in the economy was largely due to the rigidity which the fixed peg exchange rate as it fostered uncertainty in the economy and short-changed the economy of badly needed inflow of foreign exchange from autonomous sources not of course forgetting the delayed impact of the fiscal policy as a result of the unacceptable delay associated with the 2016 fiscal policy document.
One conclusion which has been generally shared by all concerned is that the period of wait was well worth it as the content reflected thorough and clear thinking on the part of the Central Bank assisted as a result of the widespread consultations which was with critical stakeholders to crystallise a consensus on the way forward. In addition there were a number of ground breaking innovations that underpinned the new approach. The Central Bank reported that the new system would operate as a single market structure via the Thomson-Reuters Order matching system as well as conversational Dealing Book. Please do not cause me to explain the details of what that means!
The Bank itself announced that it shall introduce non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMQD Trading and Reporting System which is an entirely new product in the Nigerian Foreign Exchange Market to help moderate volatility in the exchange rate by moving non-urgent foreign exchange demand from the spot to the Futures market.
Now what is clearly obvious is that there has been no one voice raised against the details of this new foreign exchange flexible management system from both within and outside the country, which in itself is a major feat considering the extent of negative sentiments with which the peg exchange rate was received which resulted in the country being excluded from some importantly systematic indices overseas such as JP Morgan Index.
Even IMF weighed in with ringing endorsement heralding the new system as the cure all panaceas. As should be expected on such matters there are, of course, some reservations expressed to the effect that the introduction of the flexible approach is belated; that it should have been introduced probably about six months ago. Some of the commentators from overseas in their shallow mindedness reported that Nigeria was for the first time introducing the flexible approach to foreign exchange rate determination despite the fact that the Central Bank in its presentation clearly indicated that it was re-introducing the Managed Float Exchange rate approach.
Continuing with the fault finding mentality the central Bank was labelled for indicating that it would operate by adopting Primary Dealership Concept. It was immediately argued that the Central Bank was introducing an oligopoly which will eventually result to price fixing! It has since been reported that the Central Bank being a listening and responsive organization has decided to postpone the Primary Dealership Concept till the end of the year as a result of this fear and the report that some banks as usual in their bid to gain market share have begun to de-market their counterparties who might not qualify to be so designated.
It is early days to begin to state categorically the likely full impact of this new system. So far what is discernible is that there is some unpredictability and uncertainly associated with the new approach which is as should be expected as all concerned are as it were learning the ropes to come to terms with the new approach. As was predicted by most of us commentator the new approach will lead to a devaluation of the Naira which is already clearly evident in two days in which the system had been in operation.
The value of the Naira had been in the middle to high 200 Naira range exactly above 250 Naira to the dollar compared to the peg rate of 198 and this is in spite of the fact that the Central Bank had to intervene massively as it attempts to keep fidelity to its promise to clear the backlog on trade arrears as well as delayed remittances. But also the parallel market has witnessed an appreciation as should be expected as the demand at the market is bound to nose dive. But realistically if compatriots are not wont to take advantage most operators in economy have since prized their products and services at the prevalent parallel market rates and therefore the fear of price spike should be unfounded.
The Stock Market was in celebratory mood following the release of the new framework as all critical indices at the market in response witnessed some improvement in the positive direction. But it has since indicated some fluctuating performance which one should expect to firm up in the positive territory as the new approach takes firm root. It is expected that liquidity would improve at the market as foreign investors who had pulled their punches as they adopted a wait and see attitude of necessity commenced doing business with the country even if, realistically, it should be expected that the return of such investors would be tentative as they test the water to be reassured of the definitive way forward.
There is also no gain saying that some of the inherent measures included in the new system have clear possibility of, on their own, impacting positively on the liquidity of the market. As observed by the central bank, the introduction of the OTC FX Futures market will encourage end-users to spread out their demand for Spot FX deals as they are now able to lock down the exchange rates for future FX requirements and the envisaged increase of supply of US Dollars due to the OTC FX Futures offered by the CBN at the Spot TX market will cause the Spot FX rate to moderate and contribute directly to the liquidity situation of the market.
The stringent reporting requirements should secure the requirement for a transparent market. The guidelines requires that all Foreign Exchange Primary Dealers (FXPDs) shall maintain such accounting and other records of their respective activities at the inter-bank market as set forth by the CBN and other relevant regulatory authorities from time to time and render returns of trades executed with the CBN to the Bank. It is also envisaged that this open reporting would engender the requisite level of efficiency at the market as all manner of back hand and shady deals are eliminated and as professionalism is enthroned. As should be expected, the likely effect of the new system on various stakeholders in the economy would be varied as there will be losers and winners.
It is expected that lack of inflow of investments both by Foreign Direct Investors (FDIs) as well as Portfolio Investors (FPIs) in Nigeria, which allegedly had been caused by uncertainty would be impacted positively, for this is the major benefit attributable to this development. But as value of the Naira falls the country stands the stark possibility of losing its claim to the largest economy in Africa as the indices are impacted. As has been reported, the recent development has already caused a drop in the rich club ranking of Aliko Dangote as his ranking fell 25 points in the Bloomberg Billionaires index.
The notional value of Naira accruable to all tiers of government are bound to increase which could impact positively on the fortunes of State governments that have not been able to make ends meet, to be able to fulfil their statutory obligations to their workers. This scenario is likely to impact some critical priority sectors such as the payment of school fees overseas negatively as the burden of the payment of school fees for those already studying overseas become onerous which would also result in the redirection of interest to educational institutions in the country as available admission position is pressured. For the Central Bank, what is not disputable is the fact that it has risen to the occasion coming out of these entire smelling fine.
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