The new foreign exchange policy
The Central Bank of Nigeria, following the meeting of the National Economic Council held on Thursday February 16, 2017 during which the Bank was requested to do something urgently to bridge the gap between the official interbank rate and the parallel market, went to work in double quick time to release the new policies. Apparently the Bank must have proactively been working on the new policies and the call was simply a prompter which removed any further delays in releasing the new guidelines. Initially at the beginning of the year there was this sudden clamor by the major stakeholders as they rose in one voice to ask the Central Bank to unify the rates of exchange in the country. But gradually through perspective advocacy some understanding was gained that the only way unified exchange rates could be delivered in the country is for all demands for foreign exchange to be met at the official window. The argument was strongly canvassed that any demands met outside the official window would invariably be at a premium. Witness the case of the licensed Bureaux De Change which as should be expected are authorized to add a small margin on the rate at which the foreign exchange is accessed at the Central Bank in dealing with their customers.
Most analysts would agree that the Central Bank has come under tremendous pressure to wield the magic wand to fix the falling value of the Naira particularly at the parallel market which in spite of its nebulous and opaque nature has dominated all discussions about exchange rate development in the country as it is believed that this market better mirrors the dilemma economic agents encounter in their attempt to source foreign exchange for their business transactions. When the rates at the parallel market breached the threshold of N 500 to the dollar it should have been obvious to all concerned that something was going to give.
Essentially what the Central Bank has done by the way of the new policy is to inject dollar liquidity into the economy to commence the process of terminating the drought which had prevailed so far. The Bank decided to fund the Commercial banks with funds targeted at meeting the needs of their bank customers in the areas of Basic/Business Travel Allowance, Medical bill payment and for the payment of school fees. It also mandated the banks to set up windows in the shortest time possible at the major airports to ease the burden of travelers as they attempt to source foreign exchange and to do so at much more competitive rates.
One has read of different rates at which these transactions are to be concluded. It was immediately reported by the popular press that the Central Bank has pegged the rate at N 375 Naira to the dollar but for the airport transactions a rate of N 366.3 was reported. But a careful reading of the guidelines released by the Central Bank as signed by its Director of Corporate Communications indicated clearly that the rates should not be more than 20 per cent of the prevailing interbank rate and since the interbank rate for now had remained at N 305 to the dollar the rate that should be used for this transactions should not be more than N 366.
The Central Bank assured that all banks would receive amounts commensurate with their demands per week in the case of the travel allowance which would be sold to customers that meet usual basic documentary requirements. While the Bank would meet the needs of parents, guardians and sponsors who are seeking to make payments of school and educational fees for their children and wards. The CBN served notice of its determination to ensure that the process of sourcing foreign exchange in this regard is as smooth as possible and that as many customers as possible receive the foreign exchange they genuinely demand and that the same would apply to customers seeking to make payments, or purchase foreign exchange for medical bills and assured that the supply of FX to retail end-users would be sustained by the CBN. The Bank warned all concerned that given its avowed determination to vigorously pursue the objectives of a transparent, liquid, and efficient FX market that it would not hesitate to bring serious sanctions on offenders be it bank or bank workers.
Since the release of this new policy, questions have been raised pertaining to whether this policy initiative would actually reduce the rate of exchange at the parallel market and therefore lead to the closing of the spread between the official interbank window and the parallel market rates and what all this portends for the economy. Well I thought it should have been obvious to all concerned that if we reduced demand pressure on the parallel market, which is what this measure would amount to, that we would witness an immediate appreciation in the rate of exchange. On the day the policy was released it was reported that the trend continued unabated despite the release of the policy as the Naira was reported to have exchanged at N 520 which was later rationalized as due to the fact that the market was struggling to come to terms with the implications of the policy for the various operators in the market. But as should be logically expected, it has since been announced that already there has been an appreciation.
One thing we can take a bet on with the parallel market is the fact that it is very responsive to demand/ supply situation, in fact if these measures are faithfully implemented within six months I should be surprised if the rates are more than N 400 to the dollar at the parallel market.
We also plead for sustainability as given the reserve position and the promised weekly allocation of one million dollars to the 21 banks which should amount on aggregate to around one billion dollars a year and considering the evolving stability at the oil market with the price consistently in mid-50 dollars a barrel, there is no reason why we should not have sustainability. And once that is the case what has just happened promises to be a game changer
We should also expect a drastic reduction in the spread. If we gain an appreciation on the parallel market rates as argued above since the interbank rates are to a large extent managed and the promised resolve to implement an effective intervention program to support the interbank market to ensure adequate liquidity necessary to deliver an efficient FX market, there is no reason whatsoever why the spread would not considerably narrow. And such evolving scenario would be salutary for the economic fortunes of the country as it is expected that there would be a boost to the inflow of foreign investments. What remains is for us to add our voice to the caution by the CBN to all market participants to assist in ensuring that these new measures engender the preservation of our external reserves as it is used for only productive purposes, to facilitate a consolidation of stability of the financial system and promote growth of the economy to the benefit of long-suffering Nigerians.
Dr. Chizea wrote from Lagos.