23:34:00
The Monetary Policy Committee of the Central bank of Nigeria last week rising from its 255th meeting in Abuja had decided to retain its monetary policies but took a critical position of reversing its stance on flexible exchange rate.
The step taken by the apex bank was one that was highly anticipated by players in the Nigerian financial industry and stakeholders in the economy in general. Having adopted a fixed foreign exchange rate policy for close to two years, it had become imperative that the apex bank change direction as the external reserves of the country became leaner in a foreign exchange regime that saw a wide margin between official and parallel market rates.
While official rate remained stable at N197 to the dollar, parallel market rates hovered around N320 for months prior to the CBN announcement last week, a N123 difference. The official market was strictly guarded as forex was provided for bank customers who had valid reasons to demand for foreign exchange.
However, as the governor of the CBN, Godwin Emefiele noted last week, the foreign exchange reserves can no longer satisfy all the demands for forex. The external reserves had consistently been depleted in the past months shedding a total of $2.45 million or 8.46 per cent since the beginning of the year. As at January 4, 2016, the reserves was $28.957 billion but had consistently trended downwards to $26.51 billion as at Monday, May 23, 2016.
The Committee had expressed concern over sustained pressure in the foreign exchange market and the necessity of implementing reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank foreign exchange market, and decided it was time to introduce greater flexibility in the management of the foreign exchange market.
For the MPC members, the key issue remains how to increase the supply of foreign exchange to the economy, as the apex bank has been working on a menu of options to ensure increased supply of foreign exchange and there was no easy and quick fix to the foreign exchange scarcity problem as supply remained essentially a function of exports and the investment climate.
Being aware that a dynamic foreign exchange management framework that guarantees flexibility could not replace the imperative for the economy to increase its stock of foreign exchange through enhanced export earnings, the committee needed a structure that would evolve to provide basis for radically improved investment climate to attract new investments.
Therefore, Emefiele said the committee in its considerations unanimously voted to adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate.
All nine members of the MPC voted to hold and introduce greater flexibility in managing the foreign exchange rate, but had agreed to retain a small window for funding critical transactions.
Although details of the flexible exchange rate policy is yet to be made know, players in the industry have commended the move of the apex bank saying it would bring a convergence of the rate at both the interbank and parallel market and further reduce the pressure on the currency.
Experts say a flexible foreign exchange policy is a self-adjusting mechanism or automatic stabilizers to restore balance of payment equilibrium allowing government to put more effort in tackling internal problems of inflation, unemployment and other such issues.
Also because monetary policies affect inflation rates, a flexible foreign exchange policy call allow for the implementation of autonomous monetary policies that addresses the problem of inflation and output. To address output, the CBN had said the small window would be strictly for critical transactions such as foreign direct investments, purchase of machineries for the production of items whose raw materials are mostly sought in-house.
This means that the apex bank is focusing strictly on giving out the country’s scarce foreign exchange only to job generating and growth related ventures, while others would have to source their foreign exchange at the market price determined by the forces of demand and supply.
This move according to the President of the Association of Bureau de Change Operators of Nigeria (ABCON) Aminu Gwadab is expected to bring liquidity to the interbank and effectively impact the parallel market and help converge its rate with that of the BDCs and eventually allow the local currency gain strength at the parallel market.
He noted that considering the level of the reserves it had been envisaged that the CBN will not open its windows to BDCs but it had been hoped that the apex bank will allow BDCs access foreign exchange from the banks.
Despite the relief the flexible exchange policy is bringing to the market, analysts are however apprehensive that the decision to create a dual exchange rate with the introduction of another exchange rate segment for critical transactions, opens the market to abuse.
An analyst at Ecobank, Olakunle Ezun noted that “as much as the flexible exchange rate policy is good for the economy, the fall out of a dual exchange rate system will not be. This is because it will create room for round tripping as there are no measures for checkmating it.”
Likewise, analysts at Financial Derivatives Company Limited say the real challenge is the introduction of another exchange rate segment for critical transactions. “This ostensibly creates a dual exchange rate which is open to abuse.
“Though an adjustment to the naira will likely have a short-run inflationary impact, we expect increased forex supply and reduced uncertainty will reduce the unintended consequences and the exchange rate pass through effect. In the end, an efficient market structure and a transparent process are likely to keep Nigeria on the real equilibrium exchange rate path (REER).”
FDC analysts also noted that the change in exchange rate policy is also likely to lead to a sharp increase in foreign direct investment as well as foreign portfolio investment and Diaspora flows.
“Nigeria had been starved of international trade and investment flows after sticking dogmatically to a fixed exchange rate policy. In spite of deteriorating terms of trade and a vulnerable trade balance, it refused to change the policy. It instead increased exchange controls by restricting imports of many items.”
Sources within the CBN however noted that the apex bank is aware of the flip side effect of the policy and is working towards formulating a policy that would minimize the risk to the barest minimum.
There is anxiety in the air as industrialists, currency traders, economists and every stakeholder in the Nigerian economy patiently await the circular that would reveal the modalities of the flexible exchange rate policy the apex bank is expected to issue in coming days.
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