Recent policy actions by the Central Bank of Nigeria on the foreign exchange market have helped to drastically discourage arbitrage in the foreign exchange market and thrust the exchange rates in the interbank and parallel windows closer to convergence, writes Obinna Chima
For years, narrowing the wide gap between the various rates on the foreign exchange (FX) market has been a source of concern to the Central Bank of Nigeria (CBN). In fact, the yawning gap between the various FX market segments created an arbitrage window for a lot of individuals as well as Nigerian banks to speculate on FX and round-trip in order to boost their earnings. Previously, findings had shown that one of the most attractive businesses among some Nigerians was to get FX for personal travel allowance (PTA) from the interbank market and sell same on the parallel market, thereby taking advantage of the wide margin. Foreign exchange round-tripping or arbitrage refers to a process whereby funds are obtained from the official forex market (at lower rates) and diverted to other markets and sold at a higher rate by forex dealing banks and users.
However, recent measures by the central bank have made such rent-seeking opportunities unattractive. It has also helped to strengthen the naira. It has also helped in unifying the FX rates for Bureau De Change (BDC), rate for retail invisibles as well as the parallel market rate.
The naira however traded within a band of N375 -N390 to the dollar throughout last week.
Masterstroke
In line with its desire to alleviate the pains of retail FX end-users, the CBN, last week directed all banks to immediately begin the sale of FX for BTA, PTA, tuition and medical fees to customers at not more than N360 per dollar. The CBN explained that it will sell to banks at N357 per dollar, adding that banks are expected to post the new rates in the banking halls of their branches immediately.
In line with the new directive, the acting Director, Corporate Communications, CBN, Mr. Isaac Okorafor, said the bank would send examiners to banks to ensure the new rates are implemented.
“Banks are prohibited from selling FX funds meant for invisibles to BDCs,” he added
Also, barely 24 hours after the policy was announced, the CBN lowered the rate at which dollar inflows from International Money Transfer Operators (IMTOs) are sold to Bureau to Change (BDC) operators to N360/$1, from the N381/$1 it stood previously. With this directive, the BDCs were expected to sell the greenback to retail end-users at not more than N362/$1, lower than the N400/$1 it used to be sold at this segment of the market.
Similarly, in continuation of its determination to sustain liquidity in the market, the CBN last Thursday increased the amount of dollars to be sold to BDC operators to $10,000 weekly, up from the $8,000 per week it was previously. This meant that the operators would be entitled to $5,000 per bid, at a new rate to be announced on Monday.
Okorafor also revealed that the central bank will commence twice weekly forex sales to BDCs from April 3, 2017.
“Licensed BDC operators are therefore required to fund their accounts with the CBN on Mondays and Wednesdays, while they receive their purchases on Tuesdays and Thursdays respectively.
“The sale amount to BDCs is hereby increased to $10,000 weekly ($5,000 per bid) and a new rate will be announced on Monday, April 3, 2017,” he added.
Furthermore, Okorafor said the objective of the new forex sale policy was to ensure a convergence of the rates in the interbank and BDC markets, stressing that the CBN remained committed to ensuring transparency in the market as well as fairness to end-users, many of whom, hitherto experienced challenges in accessing foreign exchange.
He, therefore, urged licensed BDCs to play by the rule, cautioning that the CBN would not hesitate in sanctioning any erring dealer.
Okorafor also reiterated his call to all stakeholders to play their respective roles in ensuring a smooth running of the foreign exchange market for the benefit of the Nigerian economy.
The Journey
Okorafor said before the CBN decided to fight the current battle against FX speculators, it understudied the situation in the market for several months.
“We have always told Nigerians that what was going in the black market was just a bubble. So, we studied it and found out that if we meet the demand for PTA, BTA and medicals, that, that market would crash.
“We studied it with time and when we were satisfied and with the help of the improvement in the reserves, we felt that it was the right time to strike,” he said while speaking on a programme monitored on Raypower FM.
The CBN spokesman said the relative peace in the Niger Delta, the stability in crude oil prices, as well as the removal of the 41 items from the market, helped in bolstering the bank’s ability to fight the war.
“The journey to our current situation started many years ago when successive governments failed to diversify the Nigerian economy. So, we depended on the oil economy until when the price of oil collapsed.
“That is what we are trying to change. As a central bank, we are insisting that this time, we should not spend our scarce FX on things that we can manufacture in Nigeria. We can support Nigerians to produce locally, whether in agriculture or in manufacturing. With that, we conserve our scarce FX.
“One policy that the central bank has brought out which successive government had found difficult to implement is the import substitution strategy. Now, things are changing and Nigerians are consuming rice.
“We went ahead to give credit to Nigerian farmers to acquire land, increase their acreage. We supplied them seedlings, gave them fertilisers and the farmers came out with resounding success,” he added.
Right Steps
Some financial market analysts commended the move by the central bank, describing it as a show of strength by the bank.
Also, President, Association of Bureau De Change of Nigeria (ABCON), Mr. Aminu Gwadabe, expressed satisfaction with the directive.
“We are happy about it because it is right step to harmonise the various rates in the market that have been affecting our operation. Now that the harmonisation has been achieved, we are sure that the naira will gain strength. We expect that the parallel rate will appreciate to about N370 to a dollar in the coming days,” Gwadabe said.
Reacting to the development, an analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, described it as a show of strength by the CBN.
“It also shows that they are winning the battle. I now think when the CBN talked about creating an exchange rate convergence; they were actually referring to the rate for invisibles.
“So, what the CBN has done is to show its capacity to defend the naira. But we expect the CBN to now push through with liquidity,” he added.
But Ezun expressed reservations about how much support the CBN would be able to give the naira, saying “when the external reserves begin to drop, it would raise a red flag.”
On his part, the Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, who also welcomed the move, noted that, it was a demonstration of the CBN’s capacity to defend the naira.
“I think before the CBN came out with this, it must have measured its capacity to support the naira. Luckily for the CBN, there is tight naira liquidity in the market and that does not encourage speculative activities.
“People do not have cash to buy dollars to hold anymore and that has supported the naira. The key thing is that as the CBN continues to pump dollar liquidity, it would force more people holding dollar position to sell and that would definitely help the market.
“For now, a lot of people holding dollars are looking for ways to exit,” Chukwu added.
Tread Softly
Nevertheless, the Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, who welcomed the move by the CBN, warned that the maturing FX forwards should be a concern to the regulator.
“We must remember that the FX forwards contracts started maturing as from the end of March. Forward contracts are posted-dated cheques and when they start maturing is when we would start seeing the effects of the intervention on the reserves.
“I think if for anything, we should be using this opportunity to find a fair value for the naira because oil prices have come down and forward contracts are maturing,” Rewane said.
According to him, by adjusting the rate for such invisibles, “the CBN is just subsidising Nigerians.”
“This could lead to crisis of false expectation. Rather than move the rate up, what I expected the CBN to do was to open up the market, remove all the restrictions and you will see that the currency will find its real value.
“So, first of all, it is a good move, but it is better to be cautiously optimistic rather than being carried away,” Rewane stated.
On his part, the Acting Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, said lowering the rate for BDCs showed that the intervention by the CBN was yielding the desired results.
“It is now pointing to a direction: the CBN may converge the rate at N360/$1. But to consolidate the gain, I think the CBN need to move the benchmark band for interbank rate from its current rate to somewhere close to N360/$1 to help conserve the external reserves.
“By doing that, it will send a positive signal to foreign investors who are still sitting on the fence, because the CBN is not expected to remain the sole supplier of foreign exchange.
“We also feel the CBN need to look at the corporate investors who want to take out their funds that are still trapped and see how to support them. So, lowering the rate for BDCs is good news for retail FX end-users,” Ebo added.
