OFFICIAL: CBN abolishes multiple exchange rates

Strong indications emerged on Wednesday that the Central Bank of Nigeria (CBN) has officially abolished its extant multiple exchange rate regime and directed commercial banks to sell foreign exchange (forex) freely at market-determined rates.

This is just as the Centre for the Promotion of Private Enterprise (CPPE) has explained that this is not a devaluation of the naira but, a normalisation of the foreign exchange policy regime.

The bank said the popular RT200 Rebate Scheme and the Naira4Dollar Remittance scheme would be stopped effective June 30, 2023, stressing that further guidance on these matters shall be provided in due course.

In a circular all authorized dealers and the general public, titled: “Operational Changes to the foreign exchange market,” released late Wednesday evening and signed by the Director Financial Markets CBN, Dr Angela Sere-Ejembi, the apex bank said all segments of the foreign exchange market are now collapsed into the Investors and Exporters (1&E) window.

It noted that applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.

According to the circular, the “Willing Buyer, Willing Seller” model at the I&E Window has been reintroduced.

“Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007.

“All eligible transactions are permitted to access foreign exchange at this window. The operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two (2) decimal places,” the CBN stated.

It further noted the introduction of the prescription of trading limits on oversold FX positions with permission to hedge short positions with over-the-counter (OTC) futures. Limits on overbought positions shall be zero.

The has also re-introduced order-based two-way quotes, with a bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP).

It further noted that there is the reintroduction of the Order Book to ensure transparency of orders and seamless execution of trades, whereas the operational hours of trades shall be from 9 am to 4 pm, Nigeria time.

The latest market rate said to be a “willing buyer, willing seller” arrangement permeated the foreign exchange market as the Naira depreciated against the US dollar, trading at N664.04/$ (from N471.67) at the (official) Investors and Exporters (I&E) window, data from the FMDQ Exchange has shown.

Conversely, the parallel market experienced an appreciation, with a rise of 0.85 per cent to N758/$ (from N765/$), as market forces attempted to converge.

In the same vein, one-month, three-month, and one-year Dollar/Naira forward rates closed at N666.79, N700.33, and 757.32, respectively, indicating N102.03, N189.10, and N191.70 losses.

While the CBN and FMDQ Exchange hasn’t confirmed the report, the increase narrows the gap between the official window and the black market.

Experts say a free-floating exchange rate occurs when a government allows the exchange rate to be determined purely by market forces and there is no attempt to ask the central bank to influence the external value of the exchange rate through its interventions.

Meanwhile, the Centre for the Promotion of Private Enterprise has clarified that this is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.

In a position paper, made available to Nigerian Tribune, the Chief Executive Officer CPPE Dr. Muda Yusuf explained that it is a framework which allows for flexible rate adjustments as and when necessary.

” It is a model that is predictable, equitable, transparent and sustainable. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It would minimize discretion and arbitrage in the foreign exchange allocation mechanism.

“Rate unification does not imply that rates will be exactly the same in all segments of the market. The objective is to ensure that the differentials are very minimal, possibly between 5-10 per cent.

“It is a normalization of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply. It would be dynamic; and the naira will appreciate or depreciate depending on the fundamentals.

“In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalizes and moves towards equilibrium, the rate would moderate. We also expect the new policy regime to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market,” he stated.

Mark Bohlund, a senior credit research analyst at REDD Intelligence said liberalization of the naira under a new presidential administration was expected, but the depth of the drop on Wednesday was surprising,

“My expectation was for a smaller downward shift now and for the naira to end up closer to N750/US$ by the end of the year,” Bohlund said. “The devaluation will help the federal government to better balance its books as it is still highly dependent on US$-linked oil revenue while spending is in naira.”

Under Emefiele, Nigeria’s central bank offered the US dollar through several windows at tightly controlled rates, with little liquidity, to businesses and individuals.

That, forced many to the black market, where the dollar traded more freely but at about a 60 percent premium to the official rate.

Accordingly, analysts from Cowry Assets Management Limited said there seems to be noticeable transmission effect of the forex situation in the domestic equities market which sustained its upward trend on Wednesday, spurred by positive investor sentiment following reports of the CBN allowing the Naira to freely float at the I&E window and the well-received suspension of the CBN Governor. Consequently, the year-to-date gain of the NGX ASI ballooned to 17.04% even as the Exchange printed more gainers (70) than losers (13).

Notably, banks continued to rally with FBN Holdings (+10.00%), STANBIC IBTC (+9.96%), Fidelity Bank (+9.85%), ACCESSCORP (9.79%), ETI (+9.75%), ZENITHBANK (+9.74%), UBA (+9.63%), and GTCO (9.42%), all closing higher on Wednesday.

On benefits of a unified exchange rate regime, Usuf added that : it enhances liquidity in the foreign exchange market; it reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors; it is more transparent as mechanism for forex allocation; it minimizes discretion in the allocation of forex and reduces corruption vulnerabilities and reduces opportunities for round tripping and other sharp practices among others.

“The erstwhile foreign exchange policy regime on the other hand was, for all practical purposes, a fixed exchange rate regime. It created the following distortions and negative outcome:

“Widening gap between the official, other multiple windows and parallel market exchange rates which created room forex roundtripping to flourish.

“Collapse of liquidity in the foreign exchange market resulting in acute forex scarcity. It fueled demand for forex because of the incredible rent opportunities created by the huge parallel market premium and created a major disincentive for forex inflows into the economy, thus suppressing forex supply.

“However, the CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilize the exchange rate and prevent volatility. This should happen not by fixing rate, but by boosting supply to the extent that the reserves can support,” Yusuf admonished.

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