Wednesday, 15 June 2016

Nigeria stock market surge as CBN releases new forex rules

The Nigeria stock market, yesterday, gained N294 billion in reaction to the decision of the Central Bank of Nigeria, CBN, to allow market forces determine the Naira exchange rate in a new single structured foreign exchange market.

CBN Governor, Godwin Emefiele, yesterday, announced the introduction of a new foreign exchange policy, termed the “automatic adjustment mechanism of the exchange rate” in a flexible foreign exchange regime. The new regime is aimed at boosting supply of foreign exchange and reducing the pressure on the Naira.

CBN had been under pressure to devalue the Naira for over a year now, which had been resisted by monetary and fiscal authorities, claiming that past devaluations did not benefit the economy, being import dependent. Instead, the apex bank had adopted a controlled market with pre-determined supply and exchange rate.

Announcing the major policy shift, Emefiele said: “The Central Bank of Nigeria has always maintained that it would continue to monitor situations on ground and ensure that the bank’s policies reflect these facts and developments rather than the sentiments of any groups or sectors.
“It is in the light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market.
“The workings of this market will be consistent with the bank’s objectives of enhancing efficiency and facilitating a liquid and transparent foreign exchange market.”

Highlights of the flexible regime
The new regime would operate as a single market structure through the inter-bank/autonomous window.
  • The exchange rate would be purely market-driven, using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book; 
  • The CBN would participate in the market through periodic interventions to either buy or sell foreign exchange as the need arises; 
  • To improve the dynamics of the market, the apex bank will introduce Foreign Exchange Primary Dealers (FXPD), who would be registered with the CBN to deal directly with the apex bank for large trade sizes on a two-way quotes basis; 
  • These primary dealers shall operate with other dealers in the inter-bank market, among other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) guidelines; 
  • There will be no predetermined spread on foreign exchange spot transactions executed through the CBN intervention with primary dealers, while all foreign exchange spot purchased by the authorized dealers are transferable in the inter-bank foreign exchange market; 
  • The 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN circular shall remain inadmissible in the Nigerian foreign exchange market; 
  • To enhance liquidity in the market, the CBN may also offer long-tenored foreign exchange Forwards Contract of six to 12 months or any tenor to authorized dealers; 
  • Sale of foreign exchange Forwards Contract by authorized dealers to end-users must be trade-backed, with no predetermined spreads; 
  • CBN shall introduce non-deliverable over-the-counter (OTC) naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System. 
  • This is an entirely new product in the Nigerian foreign exchange market, which would help moderate volatility in the exchange rate by moving non-urgent foreign exchange demand from the Spot to the Futures market; 
  • The OTC FX Futures shall be in non-standardized amounts and different fixed tenors, which may be sold on any date, thereby ensuring bespoke maturity dates; 
  • Proceeds of foreign investment inflows and international money transfers shall be purchased by authorized dealers at the daily inter-bank rate; and 
  • Non-oil exporters are now allowed unfettered access to their foreign exchange proceeds, which shall be sold in the inter-bank market. 
Emefiele said the primary dealers would be about eight or 10 banks with the capacity to go to the market with as much as $10 million.

Credit: Vanguard

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