In a largely positive move the Central Bank of Nigeria (CBN) has today finally announced the new forex (fx) policy framework, going further than what had been suggested at the last MPC, (a two tier system), by introducing a single flexible exchange rate market structure where the exchange rate will be purely market determined, although the CBN will intervene from time to time to buy or sell currency “as the need arises”. The latter suggests there will be an element of management of the rate by the CBN. Surprisingly though, given the move to ostensibly allow market forces to prevail, the CBN has maintained the “ban list” of 41 items for which fx cannot be accessed through the official window.
Highlights of the announcement include:
- Reserves fallen from NGN 42.8bn in January 2014 to c. USD 26.7bn (about 5 months cover) at present.
- CBN fx inflows down from highs of as much as USD 3.2bn per month in 2013 to below USD 1bn a month.
- Demand has however continued to rise dramatically, for example in 2005 (when oil was similarly at a price of USD 50pbl for an extended period of time), the average import bill was NGN 148.3bn/month. In 2015 the average was NGN 917bn per month. So the aforementioned contributed to the substantial drain in fx reserves.
- Flexible interbank fx market to now be introduced.
- Market shall operate as a single market structure through the interbank and autonomous window.
- Exchange rate will be purely market driven using Thomson Reuters and FMDQ order management system and conventional dealing book.
- CBN will participate in the market intervening to buy or sell as need arises.
- Fx primary dealers to be introduced who will be registered by the CBN for large trade sizes on a two way quote basis.
- Primary dealers shall operate with other dealers in the interbank market in terms of guidelines to be released.
- No pre-determined spread on fx spot transactions transacted through the CBN intervention with primary dealers.
- 41 items previously classified as not valid for accessing fx from the CBN official window shall remain inadmissible.
- CBN may offer long term fx forwards of 6 or 12 months or any tenure to authorised dealers.
- Sale of fx forwards by authorised dealers to end users must be trade backed with no pre-determined spread.
- CBN to introduce non-deliverable OTC naira settled futures with daily rates on the approved TR/FMDQ system. Purpose to move non-urgent fx demand from the spot to futures market to help manage demand/liquidity.
- Proceeds of fx investment inflows and international money transfers shall be purchased by authorised dealers at daily interbank rates.
- Non-oil exporters now allowed unfettered access to their fx proceeds which shall be sold into the interbank market.
- Selected fx primary dealers to be notified by Friday 17 June.
- Interbank trading to begin Monday 20th June.
- Tenors and rates for OTC naira settled futures to be announced on 27 June.
As earlier highlighted, we view this development as moving the Nigerian economy in the right direction, with one of the major policy impediments to foreign investment having now been clarified. While the backlog for outward fx demand will likely need to clear first before we can get a better sense of where the rate may settle and the liquidity that the market will have, we would expect some inward flows from offshore money, both Nigerian and foreign, that has been awaiting this announcement to offset some of those outflows. The new policy should also remove the risk of Nigeria being removed from the MSCI Frontier Markets 100 Index.
The NSE seems to have already responded positively to the news, and we would expect this to continue in the short to medium term. We do note, however, that this is not a silver bullet for all the country’s woes, with Nigeria is still grappling with other structural issues including its reliance on oil, infrastructure deficit and so forth, which will require longer term measures to correct.