Deconstructing benefits, expectations of new forex policy

Godwin Emefiele CBN governor

The Central Bank of Nigeria (CBN) on Wednesday, June 15, 2016 announced a new foreign exchange policy on how the naira will exchange with hard currencies going forward.In this report, CHIMA NWOKOJI examines the benefits, controversies and stakeholders’ expectations from the policy.


The financial world received with open arms Nigeria’s new foreign exchange (forex) system. The policy is expected to help with economic growth and restoration of investor confidence. Excellent as this sounds, a herd of stakeholders are asking for ‘more,’ which throws up a lot of controversies that only the Central Bank of Nigeria (CBN) and full operationalization of the system could convince them with satisfactory answers or needed solution.

Airline operators, genuine importers and a section of manufacturers have been trying to figure out how the new system will handle a backlog forex demand that CBN has not, met up till today. Another section of manufacturers are also struggling to fathom why 41 items earlier excluded from CBN’s official forex window, should remain excluded even from the interbank forex market under the new system.

They argue that since the new forex policy is a way of closing the door for buying dollars at the CBN official rate where 41 items had earlier been excluded, now that the exchange rate would be determined by demand and supply (market forces), the apex bank has no reason to still dictate items that will be included or excluded from the market. These and many other issues have been brought to the fore, as the flexible exchange rate regime kicks of from Monday, June 20, 2016.



Stakeholders in the financial system are joyful that the immediate benefit of the new forex framework was that investors grabbed net capital gain of over N860 billion on positive sentiments as equities recorded major rallies in  3-Days, after adding Friday’s close of N206 billion. Economists and investment bankers had said the market would continue to rally in the days ahead as local investors take position ahead of return of foreign portfolio investors.

“We believe that investors, who have been sitting on the sidelines for fear of not being able to get dollar out of the economy, will now be more willing to commit. Overall, this greater flexibility will be positive for the economy as it will improve access to foreign exchange (albeit at a higher rate) for firms which have been struggling to buy hard currency,” analysts at Cowry Assets Management Limited said.

The exchange rate of the naira in the black market, which currently strengthened to N340 on Friday from N370, is likely to weaken again initially, then possibly improve. This is because, with the official rate now more attractive, many Nigerians and foreign investors will start looking at investing in Nigeria again. Another benefit is that the secrecy behind how much oil companies and the banks exchange dollars has been removed. Everything is now open.

Some analysts applaud the CBN for allowing all banks to be among the primary market dealers. They are of the view that if only 10 banks out of 22 had been allowed to qualify for this status, it might have led to an oligopoly that could easily spoil the market, rather than creating a perfect market characterized by easy entry and exit, many buyers and sellers, homogeneous product and no information asymmetry.

Managing Director, Financial Derivatives Company Limited (FDC) Bismark Rewane, and the company’s team of experts believe there would be no more uncertainty surrounding the ex-change rate and exchange rate policy.  Since the rate can move in any direction at any time, the demand for forex would primarily be for immediate transactions rather than speculative trading which is good for the naira.

Analysts at a securities and investment company, Capital Bancorp Plc, see the framework as a bold, imaginative and positive step in the right direction. They said while the forex market may experience some volatility in the short term, “we see the market becoming more stable and transparent in the medium to long term.”

“Using the futures options, we expect most businesses and companies (especially the manufacturing companies) to plan properly as they will be able to access FX at a future determined date and at a pre-determined price. This will help curb front loading and reduce excess demand in the market,” they said.


Backlog of forex demand

This is perhaps where the controversy arises. Even after the CBN had released funds to pay off part of the backlog of forex demand, the International Air Transport Association (IATA) was said to have revealed that some $575 million was still due to carriers as of March 31, 2016. Industry sources said this amount has risen as airlines have about US$600 million stuck with the CBN. This is because of the bank’s inability to give them all the dollars they required in respect of the tickets they have sold. Based on this realization, Nigerian Vice President Yemi Osinbajo was quoted as having told IATA Chief Executive Officer Tony Tyler that airlines must agree on “a realistic and achievable payment schedule.”

At the 2016 Manufacturers outlook held earlier in the year in Lagos, bankers and manufacturers admitted that almost every bank in the country has a minimum of $1.0 billion demand for foreign exchange from their customers but lamented that the apex bank could not meet the demands consistently for over one year now.

On the part of manufacturers and importers, it is estimated that there is a backlog of $9billion. Razia Khan, chief economist for Africa at Standard Chartered Bank, said Nigeria had boxed itself in, by leaving the devaluation too late. That, she added “had left a backlog of between $6billion-$9billionn of unsatisfied foreign exchange requirements, which would be impossible to fulfill in one go, without reducing foreign reserves to dangerous levels.”

The money represents bids submitted by importers through their various banks to CBN for foreign exchange allocation for which naira equivalent has been provided at the official rate of N197/$ and N199/$ with Letters of Credit, (LCs), opened but the apex bank has not been able to meet the demand due to scarcity of the foreign exchange resources over the last one year.

The change of heart on foreign exchange policy had, Khan said, been precipitated by a realization that something had to be done to rescue an economy that contracted in the first quarter and could be heading for a yet-steeper downturn.


41 items ‘Not Valid for Foreign Exchange’

The controversy generated by these 41 items is hinged on the fact that the CBN insists there have been heavy investments in production of most of those items over a period of time and reversing the policy will hurt such investments. Manufacturers on the other hand want a review of the policy to give enough time for local production to be able to meet local supply before the exclusion.

Part of the new forex guideline read, “The forty-one (41) items classified as ‘Not Valid for Foreign Exchange’ as detailed in the CBN Circular Ref: TED/FEM/FPC/GEN/01/010, remain inadmissible in the Nigerian FX market. Applicable exchange rate for the purpose of import duty payments shall be the daily inter-bank FX closing rate as published on the CBN website.”

The Director of Research and Advocacy at the Lagos Chamber of Commerce (LCCI) Vincent Nwani said though the framework is consistent with the chamber’s aspiration, there are little concerns that require further engagement with the CBN.

He said the backlog of unmet forex demand is estimated to be about $5.4billion.

“Some of these transactions have been entered into, signed, sealed and delivered at N197 and N199 to a dollar,” he disclosed, adding that the new policy is now asking the operators to go to the market where it is not yet certain whether it will be N250 to a dollar or N300.

“If it is a market driven exchange rate, it has to be market driven. The rationale behind exempting the 41 items remains unclear. We think that since these items are not banned by the Nigerian Customs Service, the CBN has no reason to exclude them from the official forex market. We are saying that there are some items in the list that qualify as raw materials or intermediate products. The local supplies of these products are either insufficient or not even available.

“Keeping the 41 items out of the official forex window is just like saying that 23 per cent of operators in the Nigerian industrial sector should shut down and ask their staff to go. Of course many of them have relocated their plants out of this country,” Nwani lamented in a TV program monitored by Nigerian Tribune in Lagos.

For example he said, the industrial sector of the Nigerian economy requires about 1.8million metric tons of Palm Oil per annum to operate, whereas the local supply is about 600 metric tons; meaning that the deficit of about 1.2million has to be imported. He explained that it takes about 5 years to plant the best breed of Palm tree that will help local producers supply enough Palm oil.

“We have about 16 items in that list that are very important to us. When we analyzed them, they amounted to over 700 lines of products. It is important to give manufacturers some comfort so that we don’t shut down this economy. There is need to define appropriate timeframe before excluding them from official forex window or placing absolute ban on them,” Nwani said.

But genuine as Nwani’s argument seems, the CBN seem to have no time for such arguments.

The apex bank had clarified that the bulk of the demand was speculative and it was difficult to isolate the speculative demands from the real demands, hence the several controls being imposed including selective allocation of the scarce (dollars) resources.

Director of Financial Market, CBN, Emmanuel Ukeje, affirmed the apex bank’s position, saying that the policy has been in place for a while and some people have started heavy investments in producing them over a period of time and reversing the policy will hurt such well-meaning producers badly.

“It is you also that often accuse the government or institutions of policy reversal. This policy has been there and I think we need to allow it mature instead of reversing it, and you will suddenly come back to say that those who are now producing these things are now put in pain.

“It was well thought through and we felt that these are goods that could be produced locally within a very short period of time and we have seen that happen,” he said.

According to Ukeje, most of the items Nigerians earlier complained that they no longer get in supper markets because of the ban, are now being produced and the super markets are no longer running out of stock of those items. Nigerians are producing those goods and selling them. Nigerians are producing rice and other items today,” the director emphasized.

Also, CBN has a ready example of one of the local producers.In a bid to promote local manufacturers through its N300 billion Commercial Agriculture Credit Scheme (CACS) program; the bank granted N264 million facilities to the Managing Director of Psaltry farms Mrs. Iranloye Oluyemisi Yetunde. She has sinec used the money to expand Psaltry cassava factory, now a world class Agro-processing company for the production and export of high quality food grade cassava starch supplying major Food and Beverages companies in Nigeria.


More work to be done

Analysts have called the new forex policy a ‘semi-float’ since the CBN still plans on holding on to the official exchange rate for funding ‘critical transactions.’ Shifting from this, a yet another critical area which stakeholders believe needs more clarification is the issue of Naira-Dollar debit cards abroad. Investigations revealed that though banks purchase foreign exchange from CBN and authorized sellers like oil companies and exporters at N197 per dollar, they, however, sell the same dollars at exchange rate as high as N300 per dollar through overseas Automated Teller Machine (ATM) withdrawal or Point of Sales (PoS) transaction made by customers via their debit MasterCard or debit Visa card.

Though speculations are rife that banks would be charging the market-determined rate under the new policy, the question being asked by most stakeholders is: at what exchange rate would the banks sell the same dollars through the Naira-Dollar debit cards abroad? Also, the Economics and Financial Crimes Commission had recently been harassing banks’ staff over charges on forex Card Rates abroad. Following from this, the banks wrote a letter titled, “Harassment of banks by the Economics and Financial Crimes Commission over charges on FX Card Rates”, sent to the CBN on April 28, 2016. They complained that, EFCC has been going to banks and arresting staff, stating that card rate for cross border transactions should not be more than the CBN rate plus a margin of N0.50.

The banks stated that the CBN does not sell foreign exchange (FX) to banks for settlement of international cards schemes for the cross border spend on  Naira debit card, prompting most banks to be sourcing forex from autonomous market. Concerned industry sources are therefore, asking for more clarification in this area.

Similarly, investors are expectant that Nigeria will work its way back to JP Morgan government bond index, as 12 months which the lender said Nigeria would not be eligible for re-inclusion in the index nears.



What to expect

“We expect the single market structure to improve domestic and foreign investors’ confidence as they will now be able to bring in and repatriate their capital at a market determined price (this we expect to have a positive impact on the capital market which has remained lacklustre).

“We also expect this policy to narrow the gap between the interbank rate and the parallel market rate as we expect a higher percent of forex demands to be met at the interbank market,” finance experts at Cowry Assets Management stated.

According to a leading U.S. money centre bank in a note released Friday, “the naira is projected to trade between N280-N300 against the dollar, while the parallel market rate will stabilize. The supply of forex is also expected to increase.

This  implies  that  the  new exchange  rate  is  unlikely  to  depreciate  lower  than  the  parallel  market  rate. In anticipation of Monday’s new rate, the Naira appreciated from N365/$  to  N340/$  in  the  parallel  market.  This market is a marginal and fringe segment of the total market. It is also  not  a  true  reflection  of  actual  demand  but  is  influenced  by speculation,  uncertainty  and  arbitrage  activities.  One  of  the  expected  outcomes  is  that  price  leadership  will  now  rest  squarely within the regulated market segment. This will be influenced to a large extent by  the  CBN, as it  supplies  over  70 per cent  of  foreign exchange to the markets.”

Jurgen Hecker, Paris, France-based financial expert said, “The first implication is that Nigeria’s citizens will be officially poorer. Importers of goods and services will now also find it easier again to buy dollars to pay for those imports. Of course the official devaluation means that they will need to pay many more Nairas for the dollars that they need. And this will feed back into prices that Nigerian consumers have to pay for everything that is imported, which as we know is almost everything. And that is what I mean that Nigeria has become poorer,” the financial expert said in an e-mailed message to Nigerian Tribune

CBN had indicated a two-level trading structure where the apex bank would deal on wholesale basis with banks. Some traders said the immediate consequence of this is that some prices of some items, especially imported items will go up. But this price rise is not expected to be significant, since the beginning of the year, the prices of many of these items have already gone up as most importers have been getting their foreign exchange from the parallel (black) market.

Another important expectation is that of foreign investors and more remittances from abroad will increase supply of dollar in the official market and reduce demand in the black market. Some dealers are aware that the naira may be gaining strength in the black market in the next few days, just as prices of stocks will continue rising significantly for the rest of the year. Foreign investors who abandoned the capital market because “of our wrongheaded foreign exchange policy will now return and invest in the market. So you will likely see significant gains in the prices of stocks. If you want to take advantage of it, buy now,” a stocks dealer advised.

Nigeria will now be able to borrow more money from the International Monetary fund (IMF) and the Eurobond market to fund the 2016 budget, and execute capital projects like roads and electricity. Civil servants can smile again as allocation to states will go up again in naira terms and governors can once more pay salaries, although with naira that has less value. This means, Nigerians are likely to see agitations for salary increases intensify.

Going forward and as events develop, analysts expect further clarity on the design and pattern of trading both on the demand and supply side once the operations become effective. Thus, Capital Bancorp Plc advises clients to be patient and not make rash decisions until “we understand the practical workings of the new forex regime.”