CBN out with new rules to promote FX transparency and liquidity

*Tenor of forward FX sales cut to 60 days
*CBN to clear unfilled interbank market orders
*To mount effective intervention to support interbank market
*Banks to open FX window at airports
*FMDQ to reactivate order Book systems

The Central Bank of Nigeria (CBN) has announced measures to improve transparency and liquidity in the foreign exchange market.

In a statement released yesterday and signed by the acting director, corporate communications, Isaac Okorafor, the CBN listed a whole set of new measures aimed at improving transparency and boosting foreign exchange liquidity in the interbank market.
Kabir Okunlola, Partner, Audit- Financial Services, KPMG Professional Services, said the new FX rules  are expected to ease the supply side stress on the market, particularly for retail demand customers but it may not be enough, based on the current demand levels.
“However, if it is maintained, it will have the effect of bringing down the rates and streamline the current gap between the official rates and the parallel market which is where the major issue is currently”.

“The rules are in alignment with the foreign exchange management principles of the CBN, issued last year. The new rules would promote transparency and improve market confidence, reduce devaluation risks by improving liquidity” said analysts.

The new rules are also expected to help close the gap between the official and black market exchange rate of the dollar. While the dollar exchanges at N305 in the official interbank market, it sold at a new low of N520 in the black market on Monday, opening a 40 percent or N215 gap between both rates. The gap has become an attractive incentive for those who may want to round trip the currency, hence the move by the CBN to close it.

The CBN says it would immediately begin to provide foreign exchange to all commercial banks to meet the needs of both personal travel allowances (PTA) and business travel allowances (BTA) for onward sale to customers. All banks would receive amounts commensurate with their demand per week, which would be sold to customers who meet usual basic documentary requirements.

The CBN also says it would meet the needs of parents, guardians and sponsors who are seeking to make payments of school and educational fees for their children and wards.
But “Such payments must be made by commercial banks directly to the institution specified by the customer.”

However, the CBN has assured that it would ensure that the process is as smooth as possible and that as many customers as possible get the foreign exchange they genuinely demand.

“This would also apply to customers seeking to make payments, or purchase foreign exchange, for medical bills and paid directly to hospitals. The supply of FX to retail end-users (PTA, BTA, School fees, medical bills, would be sustained by the CBN.”

The CBN also said that in order to further ease the burden of travellers and ensure that transactions are settled at much more competitive exchange rates, the CBN has directed all banks to open FX retail outlets at major airports as soon as logistics permit. This will enable banks compete with BDCs to sell dollars to travellers at the nation’s airports.

The CBN also announced plans to quickly to revive the moribund interbank foreign exchange (FX) market as investors and economists blame the worsening dollar scarcity on a lack of FX trading transparency.

The CBN disclosed its intention to “increase efficiency of the FX Market,” by immediately beginning to implement its articulated programme to clear all the unfilled orders in the interbank FX market; and no longer impose allocation and utilisation rules on commercial banks; despite giving strong priority in provision of FX to the manufacturing sector.

“The key thing is one, to commend CBN and they must also ensure to implement the rules without any bucking. The beginning might be tough, but ultimately this is what the Nigerian economy needs today” said a source in the financial industry, commenting on the CBN’s decision.

The CBN will also implement an effective intervention programme to support the inter-bank market to ensure adequate liquidity necessary to deliver an efficient FX market; advise FMDQ to activate its FX Order-Book systems as soon as possible and also accelerate the on-boarding of FX clients on the FX Relationship Systems to ensure total transparency of the FX market.

“Given the CBN’s objective to continuously and vigorously pursue a transparent, liquid, and efficient FX Market, the Bank reiterates it would neither tolerate unscrupulous actions, nor hesitate to bring serious sanctions on offenders, be they banks or their staff.

“The Bank therefore encourages market participants to assist in ensuring that these new measures engender the preservation of our external reserves, stability of our financial system, and growth of our economy to the benefit of all Nigerians,” Okorafor said in the statement.

Speaking on the new rules, Razia Khan Razia Khan, managing director and Chief Economist, Africa Global Research, Standard Chartered Bank said
“It is a positive step but market participants will want to see how this works in practice.

The CBN removed a currency peg in June 2016 but continued to intervene to keep the naira at about N315 against the U.S. dollar, compared with above N500 on the parallel market.

Trading volumes have increased since then but remain low at $8.4 billion in December, compared with $24 billion in December 2014, according to Fitch Ratings.

The CBN’s gross dollar reserves have jumped by about $5 billion in three months to $29.051 billion as at February 16, 2017 as oil prices and production volumes inch up in recent months.

This has given the apex bank the necessary firepower and confidence to revive the interbank FX market.

The CBN began its intervention by selling $1 million weekly to each of the country’s 21 commercial lenders at a rate of N375 per dollar to clear a backlog of demand for retail users and try to narrow the premium between the official and black market rates.

“Market information on the allocation of the $1 million will be available tomorrow,” Johnson Chukwu, managing director/CEO, Cowry Asset Management limited said.

Chukwu told BusinessDay in a telephone call that the money will not be sufficient to clear demand for school fees and others for now.

The CBN has also decided to significantly reduce the tenor of its forward sales from the current maximum cycle of 180 days, to no more than 60 days from the date of transaction.

Meanwhile, the naira hit a fresh low of N520 versus the greenback on the black market yesterday, as retail currency traders said the new Central Bank of Nigeria (CBN) decision to sell dollars to Bureaux de Change (BDC) operators through commercial banks, was being studied.
On Friday, the naira was quoted at N516 on the black market. On the official market, the naira was quoted at N305.50.

Aminu Gwadabe, acting president, Association of Bureau De Change Association of Nigeria ABCON), said the new BDC window at N375 to the US$ may inject further liquidity and reduce the continued onslaught on the naira as a result of fear and lack of confidence in the unofficial market.
However, he said the new rate of N375 to end users by banks has further created another price discrimination by CBN.

“As the BDCs buy the proceeds of International Money Transfer Operators (IMTOs) at N381/$ and sell at N399/$, the impact will be gradual and largely dependent on how banks will want to cooperate with CBN in this regard,” Gwadabe said.
“The fear and uncertainty in the market is not making any policy to work. But there is hope that we will begin to see more dollars coming soon to the critical retail segment of the market”, Gwadabe told BusinessDay.

Retail currency users buy dollars from licensed BDC’s, however, due to the Central Bank’s inability to meet dollar demand, BDCs have tended to source dollars from private sources and resell at a much higher margin, fuelling the black market.
Currency traders said Monday that commercial lenders have compiled a list of bids from customers awaiting dollars.

Razia Khan said that given that the new PTA/BTA rate is within the range where the CBN sells to BDCs “it is not unanticipated.”

“Will it curb demand at the parallel market?  This depends on the adequacy of FX supply at the official market relative to demand.”

The Central Bank has been selling dollars at N305 per dollar to clear a backlog of demand from manufacturing, agriculture and airline companies, hoping also to help drag Nigeria out of its worst recession in 25 years, triggered by low oil prices.