On February 20, 2017 the Central Bank of Nigeria (CBN) issued new guidelines in the Foreign Exchange Market, much of which borders on measures to engender transparency and to regulate foreign currency sales to the retail market for travel allowance, medical and school fees.
The CBN has also abolished it’s infamous 60:40 rule which prioritized sales of foreign currency to manufacturers, while it reduced the tenor of forward sales from a maximum of 180 days to a maximum of 60 days.
This is the latest in a flurry of policies that has emerged since 2015, when the Bank started currency controls and foreign currency demand management.
Local media reports suggest the latest action was informed by the mandate given to the CBN at the last National Economic Council meeting chaired by Acting-President Osibanjo.
According to the reports, NEC requested a review of the current exchange rate policy due to the gulf between parallel and official rates, one which the Governor of the Central Bank Godwin Emefiele promised was being closely monitored.
The move is also likely to be related to the demands of World Bank, for Nigeria to reform its foreign exchange policy. The development institution is offering concessional funding to the tune of $2.5bn as budget support for the Federal Government which intends to plug a N2.36trn deficit.
The Retail Segment Then and Now
In January 2016, the CBN banned weekly sales of foreign currency to Bureau De Change operators which were created to meet the needs of the retail segment. However, with shortage of foreign currency supply in the Interbank market, where CBN’s dictate of rationing and prioritisation informed Forex sales, the interbank market was not able to meet demand and retail users continued to patronise the parallel market. The Naira went on a free fall and has since weakened to a high of N520/$, about 40% premium to the interbank market rate.
As part of efforts to narrow the premium, the CBN resumed supply to the BDCs in November 2016. The move has so far failed to make a dent as foreign currency sales to BDCs are short of the volumes required.
But the CBN now has a hefty war chest, with a twelve month high $29bn in external reserves, which means that it can supply more Forex to the retail segment, even if just in the short term.
Specifically, the CBN says it’s aiming to “ease the difficulties encountered by Nigerians in obtaining funds for some invisible transactions”, according to the circular published on its website.
It has committed to funding the Interbank for these needs for the near term.
The CBN intends to serve a segment of the retail market through intervention for three transactions.
“The Central Bank of Nigeria (CBN) is providing direct additional funding to banks to meet the needs of Nigerians for Personal and Business Travel, Medical needs, and School fees, effective immediately”, the apex bank said in the circular signed by Isaac Okorafor, the Acting Director of Corporate Communications.
“The CBN expects such retail transactions to be settled at a rate not exceeding 20 percent above the interbank market rate”. In effect, this stipulates a peg of not more than N378/$.
Also contained in the circular are measures to avoid loopholes and entrench more transparency, which should curtail hoarding and round tripping in the parallel market where the Naira trades at a significant premium.
Customers purchasing Forex for travel allowance will be required to submit travel documents such as their international passport, ticket, etc, while Banks are required to make direct payments on behalf of customers for school and medical fees purposes.
The Role of Banks
Probably looking to have more control over the use of its Forex sales, the CBN has opted to give Banks more role. BDCs are notorious for contravening market rules and selling above the margin set by the CBN, but Banks are probably more poised to meet it’s requirements.
Banks are expected to file the utilization of Forex proceeds with the CBN and to make payments on behalf of their customers directly to service institutions for medical and tuition fees purposes. They are also expected to open retail outlets at Airports to meet the need of Travellers.
Elsewhere, Banks have been given more flexibility to allocate and utilise foreign currency as they deem fit. This signals a gradual easing off of CBN’s stringent controls in the foreign exchange market.
This is the first move of the CBN in 2017, as analysts have watched without clarity as the apex bank built reserves while starving the market of needed foreign currency. It may perhaps also suggest that the CBN is relaxing its rigid stance, and aiming to ensure a more competitive pricing as this new move represents a tacit devaluation.
For now, there are sustainability worries as the new measures are partial and does not capture pricing in the whole market. More clarity will emerge in the following weeks before the true intent of the CBN as it relates to its foreign exchange policy can be known.
As the gap between the parallel and official market widens, the CBN will be forced to take more measures to realistically price the Naira relative to other currencies. Failure to do so will mean the CBN runs the risk of either running down its reserves or starving the market.
Written By: Adedayo Bakare, a Research Analyst who has worked in Consulting and Asset Management in the past two years, covering the global and local economy as well as top brands listed on the Nigerian stock exchange.