Wednesday, 15 June 2016

Implications of new FOREX policy in Nigeria

The Central Bank Governor has just announced a full float of the Naira
in a press conference in Abuja. The CBN Governor informed a stunned
audience that the exchange rate will be market determined and that the
CBN will also participate in the market occasionally. The CBN also
maintained that the 41 items banned last year for for access to forex
for imports remained banned.
The CBN has also appointed primary dealers for the first time which is
expected to help boost FX liquidity in the market.
In a remarkable turn on events for a CBN Governor and Government that
have for months held tightly to an artificial exchange rate, the CBN
Governor also revealed that we will be operating a single market
suggesting that we will no longer have two windows.
The CBN also introduced a two way quote which basically means that the
market will act like the stock market where buyers and sellers will
state price and quantity they are willing to sell.
The CBN Governor also confirmed that all the "pent up" demand awaiting
to be filled (for example airlines looking to repatriate their
dollars) will be met at the interbank market but advised caution for
buyers looking to rush demand. In what was quite remarkable he clearly
stated that the CBN has enough reserves to meet demand and is willing
to put its reserves on the line.
The market will also include financial products such as futures where
businesses who need dollars in the near distant future can now hedge
buy buying at a price today but get the dollars delivered when they
actually need it.
As per the new price of the Naira, the CBN Governor mentioned that the
price will be known when the market opens officially on Monday
The implication of this could be wide-ranging. However, we can only
but conclude that the end of the black market is near as anyone and
everyone can now buy dollars at any bank or with authorized dealers at
a price that is market determined.
Key highlights of the press briefing.
1. Market moving to single market through interbank via a Reuters /
FMDQ order matching system with 10 primary dealers (2 way quote
mechanism) and other secondary detailers.
2. Primary dealers will operate the interbank market. CBN may
intervene from time to time
3. Proceeds of FDI shall be purchased by authorised dealers at the
daily interbank rates
4. Non-oil exporters are allowed unfettered access to export proceeds
via the interbank rates
5. 41 items formerly constrained by CBN will still not be eligible for
trade on interbank
6. To enhance liquidity, CBN may offer long dated 6 – 12 months
forwards to authorised dealers. Forwards must be traded backed with no
authorised spreads
7. New product : Now authorized NGN futures on the FMDQ OTC – which
will allow non-standardised amounts, no fixed dates or tenors. Will
allow businesses to hedge. Futures will be NGN settled.
8. CBN says they have enough liquidity to play in the market (it
surpasses pent up demand)

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