The Central Bank of Nigeria (CBN) is looking to stem rising autonomous trading outside the official interbank FX market to boost liquidity in the latter.
In a circular signed by Alvan Ikoku, director, financial markets department, effective August 1, 2016, the CBN has directed that all Foreign Exchange (FX) related trades by authorised dealers and corporate institutions in the Nigerian forex market, be executed through the FMDQ-advised FX trading, auction and surveillance systems.
This is in furtherance of its efforts at engendering transparency and professionalism in the Nigerian foreign exchange market.
“Eleven banks have already signed up to the FMDQ FX platform as at last week and are adhering to the rules of the system, to quote all their FX transactions on the interbank market,” a market source revealed on condition of anonymity.
The market source told BusinessDay that in addition to moving all legitimate FX trades to the interbank FX market, the CBN must solve the problem of the blacklisted 41 items, which is driving significant traffic to the black market.
“Policy makers must take a bold move on the 41 items, because you can’t maintain such a policy and allow for convergence of the official and parallel market rates,” the source added.
This, as well as notions that the naira remains slightly overvalued, are eroding liquidity in the interbank market, establishing the CBN as the biggest single supplier of the greenback, BusinessDay found.
“The workings of the economy at the moment imply that the autonomous market will still thrive, but only for a while,” said Abiodun Keripe, head of research at Elixir Investment Partners Ltd, an investment bank, in response to questions.
“While the main intent for the 41 items is to encourage manufacturers to produce those items locally, structural and infrastructural challenges would not allow this happen so fast.
“A quick fix is to boost liquidity in the interbank FX market and allow for easy retail access, but of course FX illiquidity is the major challenge,” Keripe said.
Despite trading at N282/$1 on Friday, the naira remains 24.1 percent weaker at the alternative market, where it traded for N350/$1.
“If commercial banks are 100 percent free to set the exchange rate at market rates, the black market rate would disappear,” says Charles Robertson, the chief economist at Renaissance Capital, an investment bank.
“This is because as we understand it, banks do not feel they can set the free market rate.”
Nigeria’s decision to abandon the currency peg was applauded by investors and economists.
The International Monetary Fund (IMF) also threw its weight behind the move; although it gave a cautious endorsement.
An IMF spokesman said the decision was “an important and welcome step” but also cautioned that it still needs to see how effectively the new system will work.
It said, “Exchange restrictions are costly and distortionary; at best, they could be temporary, but should have been removed.”
Analysts have said the significant macroeconomic adjustment that Nigeria urgently needs to eliminate existing imbalances and support the competitiveness of the economy is best achieved through a credible package of policies involving fiscal discipline, a flexible exchange rate regime, and structural reforms.
Allowing the exchange rate to better reflect market forces was an integral part of that adjustment, analysts say.
Trading in the Nigerian interbank foreign-exchange market has yet to pick up to pre 2014 levels, even after the central bank cleared a backlog of dollar demand by selling more than $4 billion in the spot and forward markets on the first day, without the peg.
The deployment of the FMDQ-advised FX systems will only be to those corporates that have been screened and pre-approved by FMDQ in line with its on-boarding eligibility criteria, the CBN said.
The Apex bank urged all authorised dealers and corporate institutions operating in the Nigerian foreign exchange market to ensure strict compliance.
