Optimism as New CBN Forex Policy Tumbles Dollar Rate on Parallel Market

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The latest foreign exchange policy actions of the Central Bank of Nigeria, which avail the market liquidity and seek to alleviate the sufferings of forex users as well as promote efficiency in the market, have elicited reactions from economic analysts and market watchers, report Kunle Aderinokun, Olaseni Durojaiye and James Emejo

The New Forex Policy
The new Central Bank of Nigeria directive, which abolished the foreign exchange preferential treatment it accorded the manufacturing sector, absorb retail forex sales for retail users and reduced the tenor of foreign exchange denominated transaction has expectedly begun to generate interests among operators in the economy and analysts alike.
The move is aimed at easing access to foreign exchange by Nigerians as well as to foster a more efficient and competitive FX market, despite its decision to eliminate the preferential treatment, which required banks to allocate 60 per cent of FX purchases from all sources to the manufacturing sector.

Despite the elimination of the preferential FX allocation regime, the apex bank maintained that the provision of FX to the manufacturing sector would remain its strong priority. The assertion may soothe nerves amongst operators in the manufacturing sector whose major bane was inability to access FX for machinery and spare parts imports.
In fact, the CBN has provided direct additional funding to banks to meet the needs of Nigerians for Personal and Business Travel, Medical needs and School fees. The CBN expects such retail transactions to be settled at a rate not exceeding 20 per cent above the interbank market rate. The CBN has since embarked on special wholesale intervention forward sales in the interbank FX market. While it offered $500 million on Tuesday, the 23 banks were only able to buy $370, 810.79 to meet the visible and invisible requests of the customers. The bank had also sold $80 million to banks to meet the demands of their customers who had applied for FX for school fees, medicals, and business and basic travel allowances, out of the $125 million uncleared backlog for invisibles.

These are besides spot sales of $1.5 million to four banks and the offer of $41 million for sales out of which $35 million was taken up for the payment of school fees, medical bills and personal and business travel allowances. In all, the CBN had sold $491.8 million to commercial banks and authorised dealers in the market as at Tuesday.
Following the actions of the CBN, the exchange rate of the dollar to the naira continued to slide. In fact, the value of the national currency has been rising unabatedly since the announcement of the new policy. For instance, the dollar which was sold for N525 at the parallel market on Monday before the announcement, tumbled to N501/$1 on Wednesday. As at the close of business on Friday, it closed at N450/$, stronger than the N480 to the dollar from the previous day, amassing a gain of N75/$ after the announcement, thereby signalling renewed confidence in the forex market.
With the naira rapidly and daily gaining value, speculators, many of whom have lost millions of naira, are now wary of buying dollars at higher rate.
The CBN in its determined effort to ensure that the naira continued to increase in value pumped dollar into the BDC market with each operator getting $8,000.

Nevertheless, THISDAY investigation revealed that a chunk of the parallel market operators are trying to slow down the fall of the dollar to mitigate the heavy losses they are currently suffering. It was gathered that many of them had bought huge volumes at over N500/$ with the thinking that the naira will continue to fall, only for CBN to dramatically intervene, leading to the naira gaining substantially against the dollar.

The new policy, though seen by a few as a policy reversal, couldn’t be coming at a better time. This is because the country’s foreign reserves has been on the increase lately, and it is still basking in the success of an oversubscribed $1 billion Eurobond. Following the success of the $1 billion Eurobond, the Acting President, Yemi Osinbajo, late Wednesday wrote to the National Assembly requesting permission to float another $500 million Eurobond.
The new policy is seen by many as fit for purpose. It has doused the criticisms that trailed the introduction of the preferential treatment when it was introduced last August, and vindicated those who described it as unsustainable. Observers opined that appreciation of the external reserves to US$29.1 billion has empowered the apex bank to intervene by making the market wet with the greenback and this time, the approach is more strategic and targeting.
In welcoming the new policy, one analyst stated that, “CBN initially progressed in error by implementing a selective policy in the first place. Because, how do we justify allocating 60 per cent of FX at the interbank market to a sector whose output has been falling over the years, contributing less than 10 per cent to our GDP? Even when naira was strong it defies all logic. We are only treating the symptoms of the manufacturing sector rather than face the real challenges that made that critical sector of the economy uncompetitive. This recent policy therefore seeks to correct the initial anomaly and I believe it makes economic sense,” the analyst argued.

In retrospect, the former preferential forex directive could be said to have failed to impact the sector it planned to support. Compliance concerns trailed the policy while it was in effect and many operators in the sector, who initially welcomed its introduction later lamented that it didn’t benefit them.

For instance, following the directive given the preferential treatment, President of the Manufacturers Association of Nigeria (MAN), Dr Frank Jacobs, had expected that, “The directive will help give fillip to the efforts of government to reflate the economy,” but it turned out that the intended objective was frustrated. Jacobs spoke then: “You would recall that MAN has been in the forefront of advocating a special consideration and allocation of foreign exchange to the manufacturing sector of the economy. This is in view of its contribution to the development of the economy; job creation, and most importantly the much needed diversification of the economy, which is one of the priorities of the present administration. The new circular is therefore a welcome development and would give fillip to the efforts of the government aimed at reflating the economy.”

But after a period of time, Jacobs lamented that, “The 60 per cent directive didn’t impact the manufacturing sector because the banks failed to comply with it. When our members approached the banks what the banks told them was that they were not funded by the CBN as such the CBN can’t dictate to them how they sell forex that they bought from the autonomous markets.”

Stakeholders, Analysts React
While stakeholders and analysts are diverse in their reactions to the new policy, with more on the side of the CBN, members of the real sector take solace in the assurances from the apex bank that the sector remains a priority sector that it is committed to supporting.

Jacobs noted the $500 million which the CBN pumped into the forex market on Tuesday and the amount that the banks were able to buy, if sustained, will boost the economy, even though he would have preferred the apex bank is more consistent in its policy.

“The new directive is a sign of policy inconsistency; it is like taking forex from the manufacturing to fund non-productive sectors. I have contacted the CBN, and I was assured that the manufacturing sector remains a priority sector which the CBN is committed to funding and advised that we wait and see what happens.
“However, if you took note of what happened on Tuesday where the CBN offered $500 million to the forex market, this is good. If it is sustained it will increase liquidity in the forex market and this will benefit the economy,” he stated.
Another operator who is a top staff of an organisation that is strategic to the economy declared that, “It is the right route to go”.

“It is the right route to go. I’ve always said that the policy (60 per cent allocation) was not sustainable. A better way to support the manufacturing sector would be to waive import duties on critical imports; that could only be abused if people do false declaration of imports but the abuse can’t be as high as you would have with the 60 per cent exclusivity directive,” he stated.
The source also welcomed the introduction of forex sales for medical bills, business and personal travel allowances and school fees as well as the reduction in the tenor of forex denominated transaction.
According to him, “The PTA, BTA, school fees and medicals may have marginal moderate effect on the economy as it will trickle down the forex market. On the reduction of tenor, this is also good as you don’t have to wait for too long to effect transactions,” he stated.

Also, reacting to the absorption of retail forex sales for basic and personal travel allowances, medicals bills and school fees, a research analysts with the Nigerian Economic Summit Group (NESG), Rotimi Oyelere, noted thus: “The policy will no doubt birth short-term gain but the medium to long term benefits will be determined by other global dynamics, to an extent at which we can sustain supply and keep the market wet.

“Rather than focusing on the wholesale demand alone thereby leaving the retail users at the mercy of parallel market operators, who fix rates as they wish, the CBN is looking at addressing retail demand thereby redirecting traffic from the parallel market. Once demand at the parallel market declines, we can begin to see a convergence of rates and gap closing between the official price and parallel market rate. Naira will appreciate at the parallel market and based on the high import volume of basic commodities, appreciation of the naira will impact prices of both input and finished products. Hence, it is expected that inflation rate will come down, the purchasing power and the real income will improve thereby encouraging consumer to either increase the quantity of goods and services bought or save the excess. Consequently, increased consumption creates incentives for manufacturers/producers to expand production base or improve capacity utilisation. Expansion in economic activities either through production or service means more people will be engaged, hence there is job creation impact. However, the negative effect on non-oil export will be insignificant and may be naturalised by the overall gains,” he concluded

To the Executive Director, Corporate Finance, BGL Capital, Femi Ademola, “The new CBN foreign exchange policy is following our usual reaction of using supply to manage the demand for the foreign exchange.”
“While the increase in supply will help to move the equilibrium price lower by cutting out speculations, the fundamentally high demand structure indicates that the effect would be short term except we are assured of a consistent supply of foreign exchange in large volumes. To completely bridge the gap and close the foreign exchange spread will require that the CBN deplore the foreign reserves to continuously provide the needed supply, which I don’t think is wise,” he, however, added.

“Therefore, in my opinion”, Ademola suggested, “the stability of the Naira exchange rate requires the combined efforts of both the fiscal and monetary authorities and may require the complete floating of the Naira exchange rate.”

“Although the float of the Naira exchange will benefit export, but with low domestic production, the benefit is very little. The way to go to stem the current challenges is to improve on domestic productivity.”
The economist also pointed out: “One of the challenges to domestic production is lack of infrastructure; hence the FG should cut down wastages, close down leakages and use the savings for developmental projects that can help the country. With the experience and success of the recent Eurobond, it is clear that international debts can be arranged and used for development of infrastructure such as power, roads, bridges etc.”

“The state governments should support the FG to stimulate local production by creating industrial layouts that is provided with all needed infrastructure such as factory building, roads, water, power and open them out for lease (short and long term) depending on the need of the interested companies. If each state creates ready to go factory sites with all needed amenities, it would be easy to attract manufacturers, especially SMEs to them,” he added.

In his own analysis, An Associate Professor of Finance and Head, Banking and Finance Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, while commending the stoppage of the preferential treatment, urged the CBN to adopt fiscal policies which promote import substitution as a long-lasting solution to current FX crisis. 
According to him, “The recent measure by the CBN with respect to forex management is chiefly aimed at narrowing the wide gap between the official and parallel market rates as well as improving access to forex for PTA and payment of school fees abroad. 
”I am sure that the CBN is under no illusion that the tiered exchange rates which this forex policy has brought about will halt the slide in the value of the naira. While admitting that a complete currency float is capable of unifying rates and reducing round tripping and speculative activities, toeing such a part will be suicidal for an import-dependent economy that depends on a single commodity for much of its forex inflows.”

Uwaleke suggested that, “To reverse the current downward trend in the value of the naira, well-coordinated fiscal policies should be deployed to pursue import substitution and enhance the competitiveness of local production with a view to curtailing forex demand. 
”On the supply side, the government should fast track efforts to improve the ease of doing business and the state of infrastructure in order to attract foreign investments as well as develop multiple streams of earning foreign exchange. In my view, it is only when the supply of forex is guaranteed from diversified sources that the issue of market-determined value of the naira can be tabled for consideration.”

In the same vein, Economist and former Managing Director of Unity Bank PLC, Dr. Muhammad Rislanudeen, said the preferential treatment to critical sectors ought to be a good policy particularly at this period of recession except for the abuse and lack of transparency which apparently marred the regime. 
According to him “Preferential treatment in the allocation of foreign exchange is a good policy especially in a period of excess demand and limited supply. Policies that aimed to segment and preferentially allocate scarce foreign resources to critical sectors would have worked better if market is allowed to competitively allocate the scarce foreign exchange. Lack of transparency might have fuelled round tripping and persistent attack on the naira by speculators and rent seekers.”

“It might have contributed towards the wide gap between official and black market rates we have today. The only items that should continue to be denied official foreign exchange are luxury items and other items where there are import substitutes. We discourage forex allocation to areas where that may exacerbate import dependency. 
”CBN should maintain its policy of prioritising core areas like manufacturing which have multiplier effect of supporting GDP growth and job creation. Abolishing the preferential policy will create another problem of non-optimal allocation of the scarce foreign exchange by deposit money banks. CBN should also strengthen the forex policy by making it more transparent and competitive thereby enhancing more participation and liquidity in the market,” he noted.

Economist and ex-banker, Dr. Chijioke Ekechukwu, faulted the allocation of resources to selected sector in the first place. 
Ekechukwu said: “Having a preferential FX rate for the manufacturing sector was faulty ab initio. This is because it will be misapplied, it will be abused, it will be misappropriated. It was also faulty because manufacturing sector is one sector out of many others that need FX to execute their businesses.
”It will obviously not reduce the burden on Nigerian consumers. We need to know that only the forces of demand and supply of foreign currencies determine the prevailing rates of fx. We should be concerned about what will push so much foreign currencies into the market for at least six months, then foreign exchange rate will go down drastically.”
”CBN should as matter of urgency, determine the weekly consumption of FX and intervene with such volume weekly for up to 6months. Whether they do that with borrowed funds or from our reserves or from idle funds or wealth fund, it does not matter now. What matters is that such interventions should take place now and now,” he added.

However, Director, Union Capital Markets Ltd, Egie Akpata, contended that, “The new policies are really updated administrative guidelines as most of these items were getting forex 18 months ago so are not new as such.”
He added that, “It remains to be seen if all banks are providing FX for all the listed items. If they do, for how long will this be sustained?
If the CBN can meet all demand for BTA, PTA, school fees, medical for the rest of the year, then they would have taken a small but significant amount of demand out of the parallel market. On the short term, it would bring down the parallel market rate.”
Akpata proffered that, “The kinds of changes in FX policy needed at this stage are those that result in new FX inflows coming into Nigeria. Ideally from foreign portfolio investors (FPI) and foreign direct investment (FDI).” According to him, “The amount of FX under these headers is almost negligible now compared to a few years ago. The increased inflows will boost FX reserves, give confidence to the market and provide the funds for the CBN to sustain the current initiative on school fees, BTA, PTA and medical bills abroad.
He concluded that, “This move is a good first step but does nothing to bring new FX inflows into Nigeria. Hence the risk that it will deplete reserves and might not be long term sustainable.”

Analysts at FBN Capital Ltd expressed surprise at the abolition of preferential treatment to the manufacturing sector given its peculiar nature. They would have preferred the CBN maintained the policy for the sector since it is still heavily-dependent on import for its materials.

They said: “The press release reveals that the rules on allocations of fx by the banks have been scrapped. Hitherto, banks had to devote 60 per cent of their meagre ration from the CBN to manufacturing (broadly defined). This change was a surprise: manufacturing in Nigeria is still heavily reliant on imported inputs, the FGN’s programme of substitution notwithstanding, and will miss the privileged access to banks’ FX it enjoyed until this week (last week).”