Some talk of a second FX window –FBNQuest

We have seen the commentary in the local media about the adoption by the CBN of a second foreign exchange window.

Since we can find no official endorsement, we are treating the policy as perhaps the subject of a discussion paper that has somehow entered the public domain.

The idea, we understand, is that the current rate is available for priority transactions and a second, less managed rate covers all other goods and services.

We assume that the CBN would regulate both windows: otherwise “speculative attacks, round tripping and frontloading activities by actors in the FX market” (the governor’s words) would be expected to prevail.

His words are taken from the press statement of 11 January in which the halt of FX sales by the CBN to bureaux de change was announced.

It disclosed that FX would be allocated in order of priority to matured letters of credit from commercial banks, imports of petroleum products, imports of critical raw materials and equipment, and school fees and travel allowances.

The same statement revealed that the CBN’s monthly foreign “receipts” had crashed from $3.2bn to as low as $1.0bn. It becomes immediately obvious why up to N500bn is returned to the banks by the CBN as unmet FX demand each week, why some businesses are warning of shutdowns and why our manufacturing PMI fell to a new low of 44.6 in January.

The question then becomes what impact a system of two windows would have on FX supply. The more the second window was allowed to move freely, the greater would be the impact.

However, the gap created by the collapse in the oil price would be far from covered. The balance of payments for the 12 months through to September 2015 shows average monthly outflows on the current account (for goods, services and income) of $7.5bn. If we net off inflows from remittances, the average falls to $5.7bn.

A second, more “free” window would be well received, for example, by oil majors, NGOs and embassies selling FX for their local expenses, by non-oil exporters and by foreign direct investors.

A large gap would remain, however. A system of two windows is more suited to an economy in which exports sensitive to the exchange rate dominate (such as cocoa and coffee).

Such a system dovetails with CBN thinking because it establishes import priorities and involves extensive regulation. We assume that its adoption would not affect the circular on the 41 banned import items.

A CBN press release dated 19 February insisted that school fees and medical bills remained eligible for FX allocation by the CBN.