—Operators commend CBN move
The CBN yesterday in a bid to salvage the naira from speculators scraped the official window where it sells dollar to end users through banks twice a week. The naira will now be sold at the ruling inter-bank market rate indicating an implicit devaluation of the currency. The naira yesterday at the inter-bank make sold for N197 to the dollar.
Financial Market Dealers Quote (FMDQ), a group comprising Nigeria’s main commercial banks and the central bank, said commercial banks had also been banned from re-selling central bank dollars to other banks, another attempt to end speculation in the naira.
The CBN had at the libralisation of the economy opened the Whole Sale Dutch Auction but later replaced it with the Retail Dutch Auction System where banks bid for foreign exchange on behalf of their customers. The CBN in scraping its window of direct sale of foreign exchange to end users said that all foreign exchange needs are to be sourced from the inter-bank market which rate is N197 to a dollar.
This implies that Nigerians who need foreign exchange will now approach their banks and buy at the ruling rate. In Nigeria there have been about three different markets for purchasing foreign currency in the country. The CBN window called the Retail Dutch Auction System where the CBN sell dollars to end users twice a week at a much cheaper rate, the inter-bank where banks sell foreign exchange independently sourced by them at a higher rate, the bureau de change which margin is slightly higher than that of CBN, and the open market where small retailers sell forex on the streets at a more higher rate.
The existence of these several markets has always given the impression that the naira is over valued and some form of subsidy where those who buy from CBN sold at higher rate at the inter-bank market called round tripping.
The apex bank in a statement signed by its Director of Communication Mr Ibrahim Mu’azu, yesterday said “The managed float exchange rate regime, which the Bank had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.
“In recent times, however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the Bank has observed a widening margin between the rates in the inter-bank and the rDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.
“This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.
“In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves.
“Consequently, we wish to inform all authorized dealers and the general public that, with effect from the date of this press release, the Retail Dutch Auction System (rDAS/wDAS) foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the INTERBANK FOREIGN EXCHANGE MARKET. For the avoidance of doubt, all authorized dealers and the general public should note that the CBN will continue to intervene in the inter-bank foreign exchange market to meet genuine/legitimate demands.
Nigeria’s foreign exchange reserves, which was $5.4 billion in 1999, rose to an overwhelming level of $51.3 billion at end of 2007 and further to $53.0 billion in 2008, but owing to the crash in the international price of crude oil in 2008 and the aftermath of the global financial crisis, the reserve declined to $42.4 billion in 2009 further declined from $38.138 billion at the end of April 2014 to $33.04 billion in February 2015.
Reacting to the development market operators welcomed the CBN action saying it is long over due.
Reacting to the CBN announcement Mr. Bismark Rewane, Managing Director/Chief Executive, Financial Derivative Company Limited said “This means that the naira is now priced at its fair value. It is one of the best moves the CBN has made in terms of stopping this nonsense that is going on at RDAS or no RDAS. It is now time to price the market at its fair value and take away all the middlemen and round tripping. So this is the true value of the currency, the speculators are out of business. Hitherto, products were not priced at RDAS window. For example airline tickets have been priced at N202 per dollar for the past six weeks. So what are we talking about? As a matter of fact, because the price is now high the demand will reduce and the currency will now have some respite. Your reserves are $32 billion what do you expect the CBN to do. The official exchange rate is a subsidy and it has to stop because it is not sustainable
Speaking for the organized private sector the Director General Lagos Chamber of Commerce and Industry Mr Mudal Yusuf said “The closure of the RDAS foreign exchange window has the following implications: It will result in the escalation of production cost for firms that had access to this forex window. Such firms will experience cost increases of up to 20%. This will also impact on sales performance, profit margins and ultimately capacity utilization of manufacturing firms. Import duty and other port charges which are computed as a percentage of import costs will also increase. This implies additional pressure on operating costs for erstwhile beneficiaries of the CBN RDAS forex window. Firms funding requirements [in naira] will increase as firms will need to source more funds in the banks to fund their forex needs. Naira requirements will increase so will the cost of funds.
Mudal said “Given the unprecedented disparity between the CBN RDAS forex window and the inter-bank and the parallel market rates, it was clear that the RDAS Forex window was not sustainable. The huge premium of about 20% was a major incentive for round tripping, corrupt practices in the management of the forex and speculative activities in the foreign exchange market. It was also a major source of volatility in the market. It was only a matter of time for this decision to be taken by the CBN”.
Speaking to Vanguard on the issue Razia Khan, Managing Director, Head, Macro Global Research Standard Bank said “With Nigeria foreign reserves under pressure, and amid growing concern that a wide RDAS-inter-bank spread would encourage ‘round-tripping’, the CBN will now stop RDAS auctions, effectively discontinuing its Foreign exchange subsidy for certain categories of demand. This is positive news, and should help create more transparency in the Nigerian market. However, with oil prices currently at levels where Foreign reserves will be difficult to replenish, the CBN’s appetite for continued support of the inter-bank Foreign exchange rate will be closely monitored.
Kunle Ezun, a currency analyst commenting on the development said “This is implicit devaluation. There won’t be any change in the inter-bank market rate because since last week, this is what the CBN has been doing. Also this is what the market actually advised them to do. They advised the CBN, you can’t keep subsidising the naira in RDAS, why don’t you put everybody on the same platform. That is why they started with the bureaux de change. So it is just like saying let us have a unified rate in the foreign exchange market because you can’t be selling to some people at N168 naira, giving them subsidy of about N30.
Also speaking to Vanguard yesterday Mr.Victor Ogiemwonyin, Managing Director/Chief Executive, Partnership Investment Company said “This is exactly what I suggested at the stakeholders meeting that was dismissed. I am glad that they have decided to do this because you will see now that all the speculation will disappear. All the people that have accumulated money and take position will lose money. The rate will come back and settle at one point then they will lose money. So for me it is an opportunity that we should just take
Harrison Owoh, Managing Director/Chief Executive, H.J Trust BDC in his reaction said “The dollar as at today is doing N213. Each day the dollar appreciates, last week it closed at N210, yesterday it was N212. Naira will continue to depreciate, because in the morning you have one rate, the next two or three hours you have another rate. There is nothing like speculation again. Like today nobody wants to sell dollars, because tomorrow it will appreciate to N215
Mr. Nonah Awoh, an investment expert said “I think it is a good idea, let the BDCs and other users go to the banks and buy the forex, although it might result to round tripping. But why should government even encourage the BDCs. They should ban the BDCs. This is because if as an end user, I can get dollar from the banks directly why then should we keep the BDCs. If the BDCs are removed from the system then there will be less demand for dollar since only end user with genuine need can go to the banks to get the forex. Again, the suspension of RDAS will not affect the capital market directly since the operators and investors make use of local currency in their deals. This is the time to stop dollarizing the economy. Our legal tender should be naira and not dollar.
The CBN reintroducing the retail Dutch Auction System of foreign exchange was expected by market players to ensure transparency in Nigeria’s Foreign Exchange Market, “The re-introduction of the RDAS ensures transparency in the forex market, as banks have to disclose the details of all transactions.
The importation of foreign currencies into Nigeria is now subject to CBN’s prior approval. In addition, the regulatory body revoked the operating licenses of 20 Bureaux de Change (BDC) dealers.
