New Forex Regime: A Cautious But Promising Start

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Broad street, Lagos

Following the introduction of a flexible foreign exchange policy by the Central Bank of Nigeria (CBN), trading began in earnest last Monday. Kunle Aderinokun and James Emejo report economic analysts and market watchers’ assessment of the market trend in the first week of implementation of the new forex regime

The implementation of the new guidelines for the Nigeria Interbank Foreign Exchange (NIFEX) market, by the Central Bank of Nigeria (CBN), which among others, allowed for the exchange rate of the naira to be determined by the market forces of demand and supply, took effect last Monday on a rather positive note within the first few days

. With commendations from within and outside the country, the market rallied as the Nigerian Stock Exchange All-Share Index (NSE-ASI) rose by 3.17 per cent, and market capitalisation added N279 billion to close higher at N9.579 trillion on the first day of the announcement. By the close of the week, that is, three days after, the stock market (measured by NSE-ASI) garnered a total gain of about 7.97 per cent.

The CBN, which participated in the opening transaction helped clear the backlog of foreign exchange demands worth $4.2 billion to the excitement of the market and financial analysts.

The naira also reportedly firmed against the dollar, although this was only transient as it subsequently weakened against the greenback and had been under pressure after the initial strengthening.

However, experts have continued to assess the market since the implementation of the flexible foreign exchange policy which is expected to among others, stabilise the exchange rate and woo foreign investors into the economy.

Amid the fluctuation in exchange and momentary gains and losses in the market, analysts who spoke with THISDAY see the trend as normal for take-off of any new policy.

They also believed that in the long run, the objective of the flexible exchange rate policy by the CBN would be achieved.

An Associate Professor of Finance and Head, Banking & Finance, Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, noted that the initial setbacks should be expected.

“One should expect some teething challenges with such a new policy involving a radical departure from what the players are used to,” he posited.

He, however, added that, “there have been concerns about the high eligibility criteria for becoming a Primary Market Dealer. There are those who feel every form of restriction should be removed including the ban on the 41 items. Also, BDCs are complaining of being shut out.

“ I think these decisions by the apex bank have been thought through and are justified. For example, a primary dealer should possess the financial muscle to engage in large trade sizes to ensure market liquidity. The forex market is more transparent now than before and has taken off well with the naira trading at a more realistic value instilling a great deal of confidence in the economy.”

“As was expected, the gradual elimination of speculative activity in the parallel market is responsible for the naira appreciation in that market. In the near future, I foresee a near convergence of exchange rates between the interbank and parallel market. The CBN should closely monitor the implementation of the policy and be ready to make adjustments as occasion demands,” he pointed out.

Also, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, said the rate should moderate within the next three months.

According to him, “The flexible exchange rate is expected to be market determined hence whatever happened since Monday is what the market wanted. However, I will say that since it appears that CBN is the only supplier to meet the backlog of fx demand, the market is pricing it so high at the moment. If you check the bids submitted to the CBN by banks, some were as high as N382/$. This is as requested by the customers who just want the fx to complete their trades.

“With the clearing of the backlog of fx demand and the introduction of forward contracts and futures market, it is expected that future demand would be lower and even throughout the period as artificial demands moderate significantly. In addition as more fx supplies enter the market from IOCs, other exporting companies and foreign investors, the rate is expected to moderate and probably stabilise around N250/$ in the next 3 months.”

Also, an economist and former acting Unity Bank Managing Director, Mr. Muhammed Rislanudenn, said it was not surprising to witness a slow-start in the implementation of the new forex policy.

According to him, “Slow-start to a new policy implementation is naturally expected. It started well as we have done away with an archaic fixed exchange rate system that did nothing but accentuate inflation and unemployment, forcing the economy to near recession. You will notice that even the stock market is not yet bullish as expected as the foreign direct and portfolio investors are yet to return and bring in the much anticipated liquidity.

“ Importantly, there is a report that backlog of about USD4 billion has been cleared by the CBN even at the risk of depleting our weak reserve to about USD22 billion. It will take at least 10 trading days before you begin to reasonably predict and plan on a realistic exchange rate. Naira appreciation in the BDC market is expected in view of the volatility of that segment of the market that largely thrives on speculation.”

According to him, “The main concern however is if there is no commensurate liquidity in the BDC end of market and with 41 items still banned, there may be pressure on it due in part to excess demand. Government should quickly complement this policy with full implementation of the budget especially the capital aspect to reflate the economy and lift GDP growth away from recession.”

In his own assessment, former Managing Director of Guinness Nigeria Plc, Seni Adetu, stated that the Federal Government and the Central Bank had done well by finally deciding to float the Naira responsibly. “At least we are no longer chasing after scarce and seemingly unavailable dollar at N200, but readily available forex at the market price. Though the Naira is yet to stabilise and has crashed in the first two days of implementation, I am delighted to see that, first, there is a closing of the crazy gap between the so-called official and black market rates such that some unpatriotic Nigerians were smiling to the bank exploiting this loophole. “Secondly, this policy shift would eliminate the economic uncertainties of the last few months, reduce the pressure on businesses, especially players in the real sector, who are almost entirely dependent on Forex for raw materials and machinery procurement. It means the era of strict currency controls that limit the amount of foreign currency available to businesses, and its attendant mass retrenchment of staff by underperforming multinational companies and financial institutions is potentially over.”

Adetu, however, pointed out that, “our biggest challenge around the currency issue was not as to whether to devalue or not devalue. It was really about being clear on the policy direction, not leaving our investors and key stakeholders in limbo.”

Stating that, “this development addresses that,” he said, “at the end of the day, it is all about building and sustaining investor confidence. We have seen a bit of that returning in the last couple of days with trading activity at the capital market being re-ignited, as both volume and value traded on the Nigerian Stock Exchange rose and market capitalization increased.”

“Finally, following this belated but laudable move on Forex, it is now crucial for the Federal Government to fast-track the process for the diversification of our economy and break us away from the shackles of over-dependence on oil. We need to intensify the promotion of agricultural development and other value added industries with appropriate incentives,” he concluded.

However, holding a different view on the commencement of the new forex regime, Chief Executive Officer, Global Analytic Derivatives Consulting Ltd, Tope Fasua, said, “we have observed the shaky start to the new policy.”

But, he added, “it was quite remarkable that the CBN was able to clear the backlog of $4billion on the first day – even though a large portion of that was cleared using forward markets of up to 60 days as reported.”

“For me, we had no choice again but to go down this route. We hope the CBN will be able to achieve its aim of unpredictable and intermittent interventions because predictability is never an asset in that market. But since the market commenced 4 days ago, other market players seem to have left the supply side to the CBN, which is not the way to go,” the economist contended.

Nevertheless, Fasua submitted that, “We haven’t seen any or much inflows from oil companies, exporters and disapora remittances. The black market maintains a premium of up to N50 still compared with the interbank, and banks are not cooperating with the CBN. Something needs be done urgently so that the experiment doesn’t fail. We must never return to the era of predictable weekly interventions which resulted in almost N180 premium between the official and parallel (real) market.”

To the Managing Director of Dunn Loren Merrified Asset Management Ltd, Tola Odukoya, “the domestic currency should have been devalued a few years back.”

“This, in my opinion, is a step in the right direction,” he said.

Nevertheless, Odukoya noted that the new forex policy “cannot solely address the challenges of the domestic economic malaise, given that, in the short-to-medium term, there will be volatility in the market due to the pent up demand and the effects of speculative behaviour.”

However, he expressed the belief that, “over the long run – and complemented with appropriate policies and support from the right quarters – the economy will be better off, ultimately.”