The governor of the Central Bank of Nigeria, Yemi Cardoso, recently stated that the naira is undervalued and promised to work towards real price discovery in the foreign exchange market in 2024.
Following that promise, in the past seven days, the apex bank has released four significant policy measures that could make or mar the march toward a more stable FX market in the country.
In the face of the new policy redirection, the exchange rate between the naira and the dollar closed the month of January at N1,455.59 representing a whopping 37.6% depreciation in one month.
The exchange rate closed at the end of December 2023 at a rate of N907.1/$1.
At the black market, the exchange also depreciated; going from N1,215 to N1,470 to the dollar, representing a 17.3% depreciation month to date.
Nigerians have had to grapple with a month-long depreciation of the naira as demand continued to outpace supply across markets.
It started on Jan 29, when the CBN issued a circular titled ‘Financial Markets Price Transparency’. It had a lot of grammar about dealers reporting inaccurate data on executed transactions.
But the real intent of the circular was in the first paragraph where it reaffirmed its policy of “willing buyer and willing seller” particularly the part that said “…expects prices to be quoted and displayed in a transparent manner”.
This basically meant that the CBN was asking banks to report transactions in the price that they were helping customers to settle. Analysts have described it as a “price correction” to achieve market transparency.
Also on Jan 29, FMDQ issued a Market Notice of revision to the FMDQ FX Market rate pricing methodology. This notice was issued late on Friday the 26th of January and effective on Monday the 29th of January.
Observers have said it was obviously deliberately timed to coincide with the CBN circular on Market transparency. The implication of these two actions meant that banks could now sell FX at market rates and FMDQ could accurately report it.
Forward to Jan 31, CBN issued a Circular on the Harmonization of Reporting Requirements on Foreign Currency Exposure of Banks.
The summary of the circular was an instruction to banks that they immediately bring down their long positions to 0% and their short positions to 20% of SHF.
Taking long currency positions means that an investor or trader is buying FX (in this case USD) with the expectation that its value will rise over time. Essentially betting on currency appreciation. By this circular, the CBN was insinuating that many banks had long positions on the USD/NGN.
Implication:
– Banks would have to ensure that their Net Open Positions (NOP) are in line with the CBN directive within 24 hours.
– Banks with long open positions higher than 0% will have to sell the FX to customers.
– This action will bring immediate liquidity to the market. It is estimated that between $6 – $7 Billion is kept by banks in Long Positions (some of it locked up in FX swaps deals). The long and short of it is that banks will have to immediately provide that liquidity to customers to bring their NOP within the prescribed limits.
Similarly, on Jan 31, the CBN issued a circular focused on International Money Transfer Organisations (IMTOs) – Removal of the Allowable Limit of Exchange Rate Quoted by IMTOs.
Before now, there was a +/- 2.5% on the NAFEX rate in which they are allowed to deal. That limit has now been removed. They can now deal on the prevailing market rate based on the willing buyer and willing seller principle.
Diaspora remittances
Analysts have said, diaspora remittances in Nigeria is estimated at around $25 billion yearly. This went down to virtually $0 in 2023. The FX flows were just not coming into Nigeria. USD/NGN was converted by IMTOs but the USD remained offshore and never inflowed into Nigeria. Part of the reason remittance flows weren’t coming into the country was because the margins were capped (at +/-2.5%), which made the IMTOs resort to settling offshore instead of bringing the liquidity in.
With this new circular, IMTOs will be expected to inflow their USD as there is no excuse (in terms of rate) why they should not.
It remains to be seen if the IMTOs will follow the lead of the CBN. But analysts are of the opinion that before this policy was released, the CBN would have engaged with the major IMTOs to get their buy-in.
Short-term fixes may not help – Experts
A chartered banker and head, credit and risk at a mortgage bank, Oyetunji Adebambo Kufuruji, in his reaction to the latest development said: “This is the first time in over eight years that I will see a well-coordinated effort by the monetary authorities to chart a strategy that will lead to FX liquidity.
“The strategy at the onset was to first bite the bullet by ensuring price correction, accuracy and market transparency. Without that, every other action would not have made sense nor would it have worked. I liken what is happening to an orchestra performance where it would take all the parts playing in harmony for beautiful music to be produced.
“These in my opinion are moves in the right direction, one that may already be having a positive impact judging by what we are already seeing in the market. That said, with the benefit of hindsight, we should exercise cautious optimism and observe to see if these moves will build momentum that will point to a sustained positive trajectory for the economy.
“One thing is sure, this is not the end. Rather, it appears to be the beginning of many more “policy changes” to come.”
Another analyst, Godson Madu said: “Interesting moves. I only wish there is a strategy to improve trust in the Naira or guarantee some form of stability to allow for planning.
“Commodity companies are now having biweekly price review meetings. All sales incentives and credit have disappeared. Uncertainty rules supreme
“The policies by the CBN are intended to increase the supply of $. However, these are short fixes which may not solve the problem. The challenge is that most people have a problem with the Naira as a store of value due to the high inflation rate, government currency devaluation (naira) etc”
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