CBN fine-tuning new FX rules on foreseen arbitrage concerns

The Central Bank of Nigeria (CBN) is fine-tuning the operating modalities for the newly announced Foreign Exchange regime in order to address all perceived loopholes that could lead to arbitrage, particularly from the special window that it is now creating to fund critical transactions in the economy.

This is even as the nation’s capital market continues with its bearish trend, as investors, particularly in banking stocks continue to embark on sell-off following the delay by CBN to release the operational guidelines for the policy.

CBN governor, Godwin Emefiele announced at the end of the Monetary Policy Committee (MPC) early last week of apex bank’s decision to switch to the long – awaited flexibility in the Foreign Exchange market, although it would still retain a small window to fund some critical transactions.

BusinessDay gathered that the framework was actually ready as at the time Emefiele was announcing the new policy but that immediate concerns raised by market operators and analysts necessitated the apex bank to rethink the content of the framework, to ensure it meets current realities.

Some of the areas of concerns by some analysts include, the definition of the small window and critical transactions and whether arbitrage and round tripping would not be encouraged through the official window, among others.

Bismarck Rewane, managing director of Financial Derivatives had for instance, raised concerns after the announcement that having a different rate for critical transactions would obviously serve as a recipe for abuse and should be discouraged immediately.

Rewane would prefer all FX demand to face the autonomous market, which he argued, must of course be supported by market fundamentals.

Dolapo Oni, head, energy research, Ecobank, had while contributing to a programme on Channels Television questioned the beneficiaries of the window and at what exchange rate.

Friday Ameh, energy analyst had also queried the rational for the proposed window and why CBN would not like to do away with the past policies that are not beneficial to the investing public.

A top official of the CBN told BusinessDay that a key amendment to the new document would be to ensure that this critical window is kept significantly small, say much less than 20 percent of total FX market transactions.

He said the idea is basically to ensure that the window is quite small that it does not raise appetite for arbitrage or cause distortions to the fundamentals of the market.

BusinessDay also learnt that the CBN is also re-tooling what would actually constitute those ‘critical transactions’ in the new FX era to ensure they meet market expectations.

But, the banking stocks had, until Thursday, being haemorrhaging as investors in Africa’s largest economy have come to the realisation that the delay in releasing the much awaited guidelines may culminate in the loss of significant investment.

Consequently, the earlier announcement after the MPC meeting, investors’ appetite for the stocks went over the roof, giving way for a bullish rally which saw stocks soar to near a 5-month high in response with the main stock index closing at 28,260 points, up 3.78 percent to levels last seen on Jan. 5.

However, it appears a dumping competition is at hand, as investors are seen rolling over one another to dispose stocks they had found attractive in the wake of the MPC’s announcement, which they anticipated would lead to naira devaluation.

“The kind of rally we saw in the market in the couple of days on the back of the announcement to adopt a flexible exchange rate system was unprecedented and as a result of profit taking from investors,” said Tajudeen Ibrahim, team head, Chapel Hill Denham Limited, a Lagos based investment house, by phone.

However, as at Thursday, NSE All Share Index was up 1.2 percent with the main stock index closing at 27,183.64 points.  Market Capitalisation also experienced appreciation to N9.34 trillion, from N9.29 trillion as June 1, 2016.

Latest figure from the National Bureau of Statistics (NBS) showed total trade balance as at the first quarter drop by 22.60 percent to N2.72 trillion. The steep decline in exports brought the country’s trade balance down –N184.1 billion.

Nigeria, Africa’s largest economy saw its GDP growth contract by 0.36 percent, the lowest since 2004. Emefiele says the budget delay made a recession imminent and unavoidable.

“Ideological differences and reluctance to allow market forces work is responsible for the economic slowdown,” said Rewane.

ONYINYE NWACHUKWU, BALA AUGIE & LOLADE AKINMURELE