New Fx Regime puts Nigeria on path to full market economy

Shortly after the last meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria, CBN, rose from its two day meeting held in Abuja, the apex bank announced that it would adopt a flexible foreign exchange market, in an effort to further curtail outflow of the external reserves. AZUBIKE NNADOZIE writes that the MPC also introduced greater flexibility in the inter-bank foreign exchange market structure and retained a small window for critical transactions, thus paving the way the country to become a fully-fledged market economy.

Justifying the new measures, the CBN Governor, Godwin Emefiele, “had stated that in a period of stagflation, the policy options are very limited, and to avoid complicating the conditions, the Committee decided on the least risky option to hold. The foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in exchange rate policy to restore the automatic adjustment properties of the exchange rate.

Prior to the new development, the apex lender had pegged naira at N197 per US dollar, which became increasingly unsustainable due to a shortage of hard currency stemming from the slump in oil revenues.

At the black market, the naira was trading at 40 percent below the official rate as manufacturers and importers paid massive premiums to avoid hefty official currency curbs which was blamed for tipping the economy towards recession.

Following the release of the revised CBN Guidelines for the operation of the Nigerian Inter-Bank Foreign Exchange (FX) market, the two-way quote (2-WQ) inter-bank FX Market went live on the platform of FMDQ OTC Securities Exchange, FMDQ, on June 20, 2016, with the CBN’s Authorised Dealers (ADs) setting the pace for this market-driven trading window through the FMDQ Thomson Reuters Foreign Exchange Trading System.
The Guidelines, which set out a single and autonomous inter-bank FX market structure for the nation, support the CBN’s desire to enhance efficiency and facilitate a liquid and transparent Nigerian FX market.

The CBN will perform its role as a market intervention participant, in line with global standards, while market forces are left to determine demand and supply dynamics of the market. CBN FX Primary Dealers have also been introduced to help facilitate the CBN’s market interventionist role.

Through the FMDQ Thomson Reuters FX Trading System, a dealing solution for the FX trading value chain (ADs, Authorised Buyers, International Oil Companies, Oil Servicing Companies, Exporters, End-Users etc.), towards providing an enhanced user experience, improved market access and ultimately, credibility in the nation’s FX market, will be provided.

According to Jumoke Olaniyi, Assistant Vice President of FMDQ OTC Securities Exchange, the new Forex regime was meant to allow the market determine what the exchange rate would be. “It is also meant to allow the market to be professionally run, with high standards and punishment for infraactions,” she added.

She said with the new CBN list of primary dealers in place, the next few months are likely to bring a balance to the forex market and bring stability to the commencement of a single market.

In the new arrangement, the CBN ADs (as well as the FX Primary Dealers (FXPDs)) shall buy and sell FX among themselves on a two-way quote basis via the System, trade with the CBN, and will also offer one-way quotes (bid or offer) on requests-to-quote to other Authorised participants (Corporates, End-Users etc.).

According to Tumi Sekoni, Vice President & Divisional Head, Marketing & Business Development, “The inter-bank 2-WQ FX market will, through the concerted efforts of the over-the-counter (OTC) Exchange and all market participants, serve to engender an even greater investor confidence in the Nigerian FX market.

With its potential to drive transparency and liquidity, FMDQ, through the System, is adequately equipped to provide a complete and consolidated marketplace for FX trading and reporting, offering market participants and regulators a robust and flexible set of tools to support the full trade workflow.

The reforming of the 2-WQ inter-bank FX market brings about a lot of promise for the resuscitation of the Nigerian FX market and by extension the development of the nation’s economy.”

She further highlighted that the goal of FMDQ as the front-line market organiser for the OTC fixed income, FX and derivatives markets was to make the Nigerian financial market globally competitive, operationally excellent, liquid and diverse.

According to analysts from Lagos-based Afrinvest Securities, the recent move by the CBN does not only have monetary policy implications, but the larger picture that Nigeria is now embracing market-oriented policies in resource pricing and allocation.

“Coming to terms with this reality has taken a long learning curve with credibility of key public institutions undermined while also constituting a huge cost to public finances, external reserves and economic growth. Yet, we think credibility could be won back if reforms continue at current pace. Indeed, we are quite positive about this as four of the five signs we listed as signals for a rebound in the market and the economy have now been met, albeit with fiscal challenges still prevalent at the sub-national level,” they posited.

It appears however that this is also being addressed with the “Fiscal Sustainability Plan” being driven by the Federal Ministry of Finance. The plan constitutes 22 stringent conditions aimed at restoring the fiscal health of States as a pre-condition for bailout fund. Indeed, the sub-nationals might now require much less bailout funds in the new FX market environment since their dollar based income from the Federal Government will now be adjusted to the new market determined FX rates.

“We envisage that the traction in reforms implementation will smoothen the adjustment of the economy to a lower-oil price environment and thus maintain our long term investment thesis for Nigeria.

According to Director General of the Lagos Chamber of Commerce and Industry, LCCI, Muda Yusuf: Nigeria has always operated as a market driven economy. “Look at the airlines, and other sectors of the economy, even the media where you belong, how many of them belong to government? It is about 90 percent private sector driven.”

He stated that the new forex regime has eliminated the incidence of forex speculations that had bedeviled the private sector of the economy. “There is no more hoarding, there is no more speculations, investors now get forex when they need it, unlike in the past when forex uncertainties pervaded the entire sector,” he added.