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Wednesday, 15 June 2016

CBN Releases New Forex Market Guidelines, Floats The Naira


The Central Bank of Nigeria, CBN, on Wednesday announced a full float of the Naira, which will make the foreign exchange, forex, rate to be now determined by market forces, although the apex bank said it will intervene “as the need arises”.


Disclosing this in Abuja at a press conference on the Flexible Exchange Rate Policy, the CBN Governor, Mr. Godwin Emefiele averred that the 41 items banned last year from access to forex remained banned.

According to him, “We’re talking about an open, transparent two-way system… It’s intended we don’t have speculators and rent-seekers. I don’t expect that any other exchange rate will be recognized.”

For the first time however, the CBN appointed primary dealers who are expected to help boost foreign exchange, FX, liquidity in the market and 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 revealed that Nigeria will now be operating a single market, adding that the new price for the Naira will be known when the market opens officially on Monday.

Bloomberg reported that three-month non-deliverable naira forward contracts surged 1.9 percent to 310 per dollar after the announcement, suggesting traders expect the Nigerian currency to trade around that level in the market, compared with the current official rate of 199. Nigeria’s 2023 dollar bonds gained the most since 2014, with the yield falling 55 basis points to 7.1 percent, and stocks jumped 3.2 percent.

“It’s probably the best that the markets could have hoped for,” Ridle Markus, a Johannesburg-based analyst at Barclays’ Africa unit, said by phone. “It certainly seems like it will be a normal, free-floating currency. That would be positive.”

Emefiele said last month the central bank would implement a “flexible” exchange-rate policy to help alleviate a dollar shortage that has strangled the economy. Gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to 15.6 percent in May, the highest rate in more than six years.

“It is something the market will want to see in operation to fully be able to take decisions concerning future investment, especially foreign investors,” Kunle Ezun, an analyst at Ecobank Transnational Inc., said by phone from Lagos. “The takeaway is that the central bank has not committed to any exchange rate.”

The naira will probably trade in a range of 280 to 350 against the dollar after the central bank implements its decision, analysts at Johannesburg-based Rand Merchant Bank said in a note on Wednesday before the announcement.

Below is a summary of the press conference on Wednesday.


1. The Market will operate as single market through the interbank
2. The FX Rate will be purely market-driven
3. CBN will participate through periodic interventions
4. FX primary dealers will be registered to deal directly with the CBN for large deal sizes.
5. FX primary dealers will deal with other authorised dealers
6. There will be no more spread restrictions
7. The 41 items classified for not valid for FX are still not admissible in FX interbank market
8. CBN may offer long-tenored FX forwards
9. Selling of FX forwards must be trade backed with no pre-determined spreads
10. Over the Counter FX futures will be introduced. The OTC FX futures are bespoke and volumes could be non-standard
11. Non-oil exporters are now allowed unfettered access to export proceeds via the interbank market
Timelines
12. Guidelines of the general FX market will be released immediately
13. Guidelines for FX primary dealers will be released immediately
14. FX primary dealers will be appointed and notified by June 17, 2016
15. Interbank FX trading under the new guidelines will begin on June 20, 2016.




Read: DEVALUATION/ FLOATING EXCHANGE RATES IN LAYMAN'S LANGUAGE.

By Abubakar Usman Almajiri.

OPINION

Numerous friends have in-boxed, phoned and inquired  that I help them understand the issue of devaluation. There may be others who may need help on that. Please find below an itemized attempt by me at explaining it. I summarised it in plain language and think I have oversimplified it but it still cannot be a small piece.
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CONSIDER THIS ILLUSTRATION FIRST
Lets say machines and all implements for a plant for manufacture of batteries or fertilizer is $100,000 from USA. Lets assume a dollar is N197. That means you will need N197,000,000 to erect the company. Lets say foreign operators are paid $10,000 monthly. that will be N1,970,000 a month.

If the dollar should be N500, the same plant and implements will cost N50,000,000 and the same foreign operators will earn  N5,000,000. The higher the dollar the higher the Naira cost.

Now how about lower rates? Lets say our government is able to fix and support  a N1 to $1?! The same plant will cost just N100,000 and the foreign operators will be paid only N10,000. This means that thousands of Nigerians can afford to go abroad and purchase many industries and technologies and  machines and can afford to hire foreign experts to do the work of technology transfer without any bilatralism.

Imagine what that can do to unemployment, economic growth, taxes to government, Vat , infrastructure development etc
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1. There is the Fiscal Policy and monetary policy. Both are tools used to influence a nations economic activity. fiscal policy has to do with the the Government Executive and legistlature. Monetary policy has to do with Central banks and includes interest rates, supply of money etc and Devaluation issues falls under the monetary policy.

2. As a matter of monetary policy, CBN in veiled liaison with government sets and impliments foreign exchange policy. This is a policy that governs how a country's currency exchange with others.

3. There are basically two broad choices of Foreign Exchange policies (Forex Policies). a) Fixed exchange rate policy b) Floating exchange rate policy.

4. Fixed Exchange rate policy is a system by which the CBN sets a rate by which the currency exchanged to the dollar or any other currency. Emphasis is on the dollar because must currencies usually convert to dollar first before relating to respective currency.

5. Floating Exchange rate on the other hand is a system by which you dont fix or set or peg that rate of exchange between your currency and others. You allow market forces other known as demand and supply to determine the rate to exchange your currency. ie if your currency is demanded more by another currency, it becomes scarce and more expensive in relation to that currency. If your currency demands less of the other currency, your currency becomes not scarce and cheap for the other currency.

6. Each of the policies is allowed to be practiced without any hindrance. There is rarely any of the developed countries that has not  practiced Fixed exchange rate system before situation changed for them to use a floating system. So each of them is useful but depending on the circumstances of you country.

7. Each of the policy has its problem sides which are remedied through other economic and rational approaches.

8. If you choose to Fix your currency exchange rate, you will have to support the currency with your foreign reserve which is in your countries current account.

A country's current accounts are with the IMF and shows the sum of your total earnings in dollar on one side and total expenses on the other side. The earnings come from trade (sales) between your country and other countries or other sources like loans, grants, payments by diaspora to dependents back home etc. . Expenses comes from similar things but in outflows. At the end of a period, the balance between the income and the expenditure indicates balance of payment and balance of trade. i will not discuss the here. But you should know that the balance can be favorable or adverse. The adversity can be reduced through cutting of imports and boosting of exports. You can decide to ban some imports as a way of reducing them but at the peril of you citizens who need it. you can also start local production and then exporting them too. That requires other details.

9. If you choose Floating Exchange policy, you are allowing your currency to compete with others and find a value for itself. For a country like Nigeria whose import is by far more than exports, Floating the Naira against the dollar means Naira will be from N500 to 1000 or more even up to N5000 or more to a dollar any time soon. If that happens, for every product you have to buy from abroad, each dollar multiplies by the floating rate.

10. Implications. Nigeria is not industrialised. and we urgently want to industrialise.  lets say machines for a plant for manufacture of batteries is $100,000 and a dollar is N197 that means you will need N197,000,000 to erect the company. Lets say foreign operators are paid $10,000 monthly. that will be N1,970,000. If the dollar should N500, the plant will cost N50,000,000 and the foreign operators will earn  N5,000,000. The higher the dollar the higher the Naira cost. Now how about lower rates? Lets say our governmnet is able to fix and support  a $1 to N1?! The plant will cost us N100,000 and the foreign operators will be paid only N10,000. This means that Nigerians can afford to go abroad and purchase any industry, the machines and can afford to hire foreign experts to do the work of technology transfer without any bilatralism. How many industries do you think will emerge over night? And with government careful assistance we can get strong within a short time. Thats how good finance policies changes the economy like magic.

11. Epilogue: It is when local industrialization has reached an very strong level and ready to export that you change the policy to devaluation. Devaluation reduces the harshness of your fixed currency by making you products cheap to foreign parties so that they can afford your products  and you can sell well like china is selling today. You dont need the foreign experts now and they will not like you because you currency is not strong enough to keep them around. And they will go whilst your now fully trained people takeover. The same thing China did. The more you devalue, the more you sell your products and it will reach an extent when foreign powers will begin to beg or pressure you to revalue as they do China today. You cant afford to float your currency even at this stage unless you are sure you can withstand it or the real value of you currency can withstand it.

12. Conclusively, as we devaluate or float our currencies, the beneficiary  is certainly not Nigeria or Nigerians but the developed countries who will find our oil extremely cheap and cost-less whilst we find their products extremely expensive. That is the main reason why IMF always goes north pole/south pole to see us devalute.

While they ask us to devalue or float, the ask china to overvalue. In our case, oil, which is what they require and which is non-competitive is bought almost free. But Chinas's industrial products which compete with their merchandise around the world and even in their countries will be too expensive and loose if China revalues its currency.

By Abubakar Usman Almajiri, who writes from Kaduna,Nigeria.

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