Naira in 3-day recovery as new forex policy kicks off today •BDC operators seek CBN’s FXPD licence

Godwin Emefiele CBN governor

godwin-emefiele-new-cbn-govThe Nigerian Naira which opened early last week at N370.00 to a United States  dollar at the parallel market, appreciated between Wednesday and Friday to N355.00/US$1.00.

This sudden recovery follows the announcement of the much awaited flexible foreign exchange (FX) policy guidelines, trading of which kicks off today June 20,2016.

The Central Bank of Nigeria (CBN) said on Wednesday it would begin market-driven trading of the naira today to reduce chronic foreign exchange shortages, but it has given few details on how.

Dealers said though the local currency had hovered around  N340 to N350 at the Bureau De Change segment in some markets till Friday, market rate for the local unit is expected to be determined this week as the new FX policy framework becomes operational.

Meanwhile, banking sources over the weekend said Nigeria’s commercial banks have asked customers to submit forex bids ahead of the start of the new trading.

The sources observed that banks asking customers to submit bids is a signal that the new forex trading platform will be driven by market forces and not dominated by internal bank trading.

After a meeting with CBN officials and bank chief executives late on Friday, banks asked their clients to send them pending letters of credit (LCs) for them to resubmit and to quote a rate at which they want to buy dollars, the source said.

Though the average rate at which the market clears the demand will become the new exchange rate, fillers have it that customers have so far submitted bids between N210 and N290 to the dollar, better than N270-N300/$ said to have been projected by bank treasurers on Friday.

This is also similar to the result of a Reuters poll which found that analysts expect that when the naira floats freely today it will trade at between N275 and N300 per dollar.

“I got a memo from my bank yesterday asking us to contact all our customers with pending LCs to resubmit their LCs and say at what rate they would want to buy the dollars,” the banking  source said.

The CBN pegged the naira rate at N197 to the dollar for the past 16 months after a slump in oil revenues hammered public finances and its foreign reserves. But the currency trades at around N355 on the parallel market.

Sources said the CBN had admitted there is a $4 billion backlog of demand in the market which could take three to four weeks to clear.

Dealers from an investment banking and securities company Afrinvest, said interbank market rate is expected to spike while parallel market rate is likely to converge towards the interbank rate on increased dollar supply.

“On a whole, we reiterate the concluding remark of the CBN governor that market participants should ‘Be calm, no need to worry, everything is fine,” he said.

The CBN finally released the much awaited flexible FX policy guidelines last week, surpassing consensus expectation. The new policy includes the adoption of a single FX market structure via the interbank market while CBN participates through interventions.

Foreign Exchange Primary Dealers (FXPDs) will be engaged by the CBN for large sized trades while other operators such as Non-FXPDs, oil companies, oil services companies, exporters and end-users will operate as market participants.

In addition to having a strong FX trading capacity, FXPDs will be appointed on meeting at least two of three criteria which include: shareholders’ fund unimpaired by losses of N200.0 billion; minimum of N400.0 billion in total foreign currency assets and minimum liquidity ratio of 40.0 per cent. Sources on Friday said all banks have been allowed to trade as FXPDs.

The new FX policy kicking off today also includes the introduction of derivatives products, done in partnership with Financial Markets Dealers Quotes (FMDQ) as risk management tools.

According to FMDQ, the proposed Naira-settled Over the Counter (OTC) FX futures are “non-deliverable forwards.” This is expected to help foreign investors protect their FX exposures in the Nigerian currency market.

Dealers believe that this should signal the reversal of foreign capital outflows at the peak of the FX crisis.

“Our major concern relates to the 41 items which according to the CBN would remain inadmissible for FX transactions at the interbank market, thereby creating a reason for the parallel market to thrive, especially as the Bureau De Change operators are not allowed to operate in the interbank market,” the dealers said.

Also, Samir Gadio, head of Africa strategy at Standard Chartered Bank, London in an email message said, “foreign investors will need to be convinced that the new FX regime is sustainable in the medium-term and will likely also require higher yields before resuming the purchase of local debt.”

Meanwhile, the Association of Bureau De Change Operators of Nigeria (ABCON) is calling on the Central Bank of Nigeria (CBN) to grant it one out of the Forex Primary Dealership (FXPD) licences to be issued by the regulator.

ABCON President, Alhaji Aminu Gwadabe, who disclosed the group’s position on Sunday, said as a major and critical stakeholder in the forex business, it will be against standard business practice to exclude bureaux de change (BDC) operators from the workings of the new CBN forex policy.

He said such licence would enable bureaux de change (BDC) operators access Diaspora remittances estimated at $21 billion annually and by extension, deepen dollar liquidity in the system.

ABCON is also asking the CBN to grant it self-regulatory status that would enable it monitor and supervise its members’ compliance with the extant regulatory requirement on the new forex regime.

Gwadabe said there are about 3,000 BDCs under the ABCON umbrella, and that granting one out of the about 10 FXPD licences to the group, would be in the interest of the financial system and economy.

The FXPDs qualified lenders are registered authorised dealers designated to deal with the CBN on large trade sizes on a two-way quote basis.

They will serve as the bulk traders dealing directly with the CBN on forex matters. Gwadabe faulted the stringent conditions for qualification as an FXPD saying it will establish a new cartel in the banking industry and place only a few banks in advantage positions. Based on banks’ 2015 and March 2016 financial results, only the Systematically Important Banks (SIBs) or tier-1 banks are going to qualify.

The appointment of these banks as FXPDs could imply they control a relatively higher proportion of forex market volumes.

The ABCON boss said the role of the primary dealers should be to boost offshore dollar inflow into the economy rather than buying the limited dollars from the CBN.

“I see the FXPD policy as formalizing the operations of the black market operations unless more operators are licenced to run it. The policy has already created cartel and monopoly to select few in the financial market,” he said.

In the new guidelines, the apex bank had said the market shall operate a single market structure through Inter-Bank Foreign Exchange Market “with the CBN participating in the forex market through interventions directly in the inter-bank market or through dynamic Secondary Market Intervention Mechanisms”.

Under this structure, “Inter-bank funds shall  NOT be sold to Bureaux-de- Change.”

Aminu Gwadabe, in a statement made available to newsmen on Sunday said the criteria were too stringent.

The guidelines further stipulated that  participants in the inter-bank forex market shall include Authorised Dealers, Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users and any other entity the CBN may designate from time to time.

According to Gwadabe, the present dollar liquidity situation in the economy can not support the primary dealer structure.

“The role of the primary dealers should be to bring in dollars from abroad not to be buying the limited available dollars of the CBN and circulate in the economy. The policy is formalizing the operations of the black market operations,” he lamented.