Sunday 17 July 2016

CBN finally frees the Naira; ...funds $697m forward contracts

Central Bank of Nigeria (CBN)
Following the pressure mounted by the financial markets and analysts on the Central Bank of Nigeria (CBN) to allow the naira to be truly market determined so as to attract offshore investors who have continued to remain on the sidelines, the CBN has finally freed the nation’s currency so that its rate on the Nigeria Interbank Foreign Exchange (NIFEX) will be determined by the interplay of demand and supply.

The central bank will equally fund the one-month forward contracts of $697 million this week, meaning that authorised dealers that bid on behalf of their customers for the contracts last month would be making a kill of almost N10 to the dollar, given that the naira fell to N292.25 on the interbank market last Friday.

On the first day of trading under the revised rules for the NIFEX on June 20, the CBN had intervened in the market through the Special Secondary Market Intervention Sales (SMIS) to clear the backlog of $4.02 billion pent-up demand for FX.

According to the CBN, it sold $532 million on the spot market and $3.487 billion in the forwards market.

A breakdown of the $3.487 billion forward sales by the central bank showed that $697 million was for one month (1M), $1.22 billion for two months (2M) and $1.57 billion for three months (3M).

On the full liberalisation of the interbank FX market, THISDAY learnt that pressure was brought to bear on the CBN when it was discovered that since the launch of the revised rules for the NIFEX market last month, the CBN through its interventions had pegged the naira within the range of N281-N284/$.

A banking industry source said that the central bank retained the peg despite announcing that it had floated the naira because of the continuing opposition by President Muhammadu Buhari to the devaluation of the Nigerian currency.
He said: “President Buhari only sanctioned the introduction of the flexible exchange rate regime when he saw the damning data released by the NBS showing that the Nigerian economy had contracted in the first quarter of this year and had effectively slumped into a recession.
“He was a very reluctant convert, so when he expressed his opposition again after the market had been partially liberalised, the CBN slammed the breaks on the naira and started pegging it again.
“But pressure was mounted on the central bank to allow the naira find its true level because offshore investors had taken note and refused to bring their money, thus exacerbating the FX scarcity in the market which the flexible exchange rate regime was meant to resolve.”
Signalling the move towards a proper free float of the naira, The central bank held a conference call on Friday with authorised dealers in the FX market, during which the information was communicated to them.

Also, just as the conference call was taking place, the CBN Governor, Mr. Godwin Emefiele, was at a lunchtime meeting with investors in London, where he was said to have told foreign investors that the flexible exchange rate would now operate fully.

A source, who was at the London meeting, said what they gathered from the meeting with Emefiele was that banks were now free to set pricing at a level where supply would match demand for forex.

The central bank anticipates that this new policy would encourage those that have forex to bring it and sell, now that they can get more naira.

As a result of the development, banks made higher bids for forex on Friday, thereby leading to a depreciation of the naira.

Indeed, the naira depreciated against the United States dollar across all FX market segments on Friday. On the interbank market, it fell to an all-time low of N292.25 to a dollar and depreciated at the Bureau De Change and parallel market segments by 2.9 per cent and 3.13 per cent to N355/$1 and N365/$1 respectively, as demand at the interbank market spilled over to the alternative market segments.

Credit: ThisDay

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