Forex liberalisation may depress Naira

The return to full liberalisation in the nation’s foreign exchange market within the next three months may have the immediate effect of precipitating an official depreciation of the naira, analysts said at the weekend.The Central Bank of Nigeria (CBN) had announced that it would liberalise the foreign exchange market, a move expected to divest banks of the monopoly powers over foreign exchange (forex) rates in the past few months. 
In the view of analysts, the naira would naturally shoot up with the invitation of the forces of supply and demand before reaching an equilibrium which is expected to narrow the widening gap between the official and parallel rates.
The weekend development is a direct response to series of publications by BusinessDay advising CBN to urgently intervene in the foreign exchange market to arrest the imminent crisis as the number of middlemen and phoney companies used to perpetuate sharp practices are on the increase daily.
But before now banks had dictated the forex rates which had continued to widen between the official and parallel rates. The practice which is at variance with CBN’s mandatory role of exchange rate management now provides temporary opportunities for banks to open multiple accounts for forex transactions.
BusinessDay investigations at the weekend revealed that banks and their Bureaux de Change (BDCs) are leveraging on the monopoly status conferred on them by CBN’s reforms to dictate the rates through rationing the supply of the forex to the market and in most cases establishing direct contact with the black market operators.
Consequently, banks, anchoring on the approved plus two margin allowed by CBN, sell at about N150/$ and recorded officially in their books.
Other charges regarded as ‘gratification and documentation’ of about N10 and N15 respectively are required to be paid into an account for which numbers are provided immediately.
Analysts said at the weekend that with a reduction of over $700 million from the nation’s foreign reserve within three months, occasioned by surge in demand for forex at Retail Dutch Auction System (RDAS), it is logical for CBN to embark on policy reversal. However, they further argued that the action is expected to take the banks which have been profiteering to the drawing board, which is expected to put CBN on its toes. 
Reacting to the liberalisation of the foreign exchange (forex) market, Wale Abe, chief executive officer of the Money Market Association of Nigeria (MMAN) said one thing that is likely to happen immediately is the increase in the official forex exchange rate. This is because the forces of demand and supply which have been caged by the apex bank will once again be free to act on the market.
Basically, Abe said that the CBN decided to liberalise the market because of the widening gap between forex rates in the official and parallel markets. And since the official market was pampered by the CBN which took control of supply of forex at the market, and to some extent demand, forex rate at that end of the market was caged by the CBN.
Unfortunately, he said the apex bank had little influence on the parallel market, leading to widening gap in the markets. “But with the new liberalisation policy, the gap is expected to narrow with expected rise in official forex market rate,” he said. Abe is also of the view that with the liberalisation of the forex market, the inter-bank market will also come alive, thus spicing up the forex market generally.
To the president of the Chartered Institute of Bankers of Nigeria, Erastus Akingbola, every country devalues her currency in times of crisis to conserve foreign reserve. Akingbola, at a parley with media executives to commemorate his first year as the institute’s president said that given the circumstances, CBN should be commended.
Meanwhile, investigations revealed that the margin enjoyed by banks on foreign exchange transactions has suddenly shot up by more than 1,000 percent even as fake foreign currencies have hit the foreign exchange market with fraudsters taking advantage of the scarcity to defraud foreign exchange end users.
Indeed, by re-introducing the RDAS early this year which among other things cancelled inter-bank trading and tied forex requisitioning to individual customers and transactions, the CBN had hoped to tighten control on the market, forestall abuse and, in the process, restore sanity to the system.
But, Chukwuma Soludo, while announcing the policy reversal at the weekend in Abuja said that Nigeria’s foreign exchange reserves stand at $45 billion, down from $45.7 billion at the start of the month.
“Now it is $45 billion … We started the month at about $45.7 billion,” Soludo said.
He said CBN would return to a fully liberalised foreign exchange market over the next three months, allowing banks to freely trade among themselves after months of restrictions, while at the same time increasing the net foreign exchange open position for banks to 2.5 percent from one percent with immediate effect, a first step toward lifting measures brought in January to stem the naira’s sharp decline.
“Banks are no longer mandatorily required to sell to the central bank after five days funds sourced from non-RDAS and non-oil export proceeds and may use such funds for interbank transactions,” Soludo said

 

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