There was hope yesterday that the volatile foreign exchange market will soon get stable.
The naira exchanged for 280 to the dollar at the opening of the Central Bank of Nigeria’s (CBN’s) Flexible Exchange Rate regime designed to unify the official and the autonomous rates.
The rate, which was the outcome of the interplay of demand and supply forces, depressed the value of the local currency by about 29 per cent from its previous level of N197/$ when the apex bank hitherto pursued a defensive policy in its foreign exchange management. But the backlog of over $4billion pent-up demand was erased by the apex bank at this first outing.
CBN spokesman Isaac Okorafor said last night that it was happy that its objectives to clear the FX demand backlog, perform its role, strictly as a market intervention participant and re-launch a functioning and efficient inter-bank market, were being met.
He said: “The CBN, in line with its desire to promote a transparent, liquid and efficient market, and in order to engender market confidence and ensure credible price formation, intervened in the market through a special Secondary Market Intervention Sales (SMIS), addressing the issue of the FX demand backlog by clearing $4.02bn through spot and forward sales.”
This served in no small way to stimulate price discovery, with the determination of a marginal rate of $/¦ 280 through the Special SMIS process.
“So, we can state to you categorically that the FX demand backlog has now been cleared and behind us for good,” he added.
The regulator assured participants and the public that it was resolutely committed to making the Nigerian FX market globally competitive, credible, transparent, liquid and efficient. It praised participants that collaborated in their conduct to achieving these feats, adding that the CBN was looking forward to another successful on June 27, 2016, when “the market launches its innovative hedging product, the Naira-settled OTC FX Futures.”
Although Okorafor was silent on the level of the CBN’s intervention, The Nation learnt that about $500million was released by the regulator to close the gap created in the interplay between what was demanded and what was available.
The National President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Chief Bassey Edem, described the new flexible Foreign Exchange regime as “a welcome development”.
He said the policy will further drive down the exchange rate of the naira to the dollar in the coming weeks, which would in turn, spur economic growth. “The Naira/$ exchange rate is going to drop from next week,” Edem said, adding that the policy will also encourage more Diaspora remittances. It will open the floodgate for influx of remittances by Nigerians abroad.
Edem, however pointed out that consistency is key to the success of the policy, expressing optimism that if the new forex policy is implemented without the inconsistency that usually characterises government’s policies, the naira would gain significant value before the end of the year.
He however, said the CBN had last Friday at a meeting with members of the Organised Private Sector (OPS), promised operators that the policy would not be dropped midway or reversed.
On the retention of 41 items not eligible for the forex market, the NACCIMA chief said the CBN at the meeting informed the OPS that it would not back down on the import prohibition list, unless OPS members showed proof that any of the items on the list cannot be produced locally, pointing out that as far as he is concerned, no member of NACCIMA has given the association proof that any of the items cannot be produced locally. “As soon as any member proves otherwise, NACCIMA would take it up with the CBN,” Edem said.
Former Vice President, African Development Bank, Chief Bisi Ogunjobi, said : “To the extent that there has been a speculation of the naira being pegged at around N300 to the dollar, I think the N280 peg is a welcome development. In fact, the mere fact that we have a decision is a welcome development considering that there has been clamour even from the international community for a devaluation of the naira.”
However, foreign currency analysts are of the opinion that the local currency would experience some depreciation in the weeks and months ahead.
“They can’t do this for months,” said Jonas David, a Zurich-based emerging-markets analyst at UBS Wealth Management. “‘We could see further pressure on naira to levels close to N300,” Bloomberg said, adding that Forwards markets suggest the depreciation has much further to go. Three-month naira non-deliverable forward contracts rose 0.6 per cent to N322 against the dollar. One-year contracts climbed 0.9 per cent to N357, heading for a record close.
They argued that there may be higher volatility until the market becomes more functional, adding that foreign investors will need to be convinced that the new foreign exchange platform is sustainable before they resume the purchase of local assets.
