CBN closes official Forex Window to Importers

Determined to bring sanity into the foreign exchange market bedeviled by speculative demand and round-tripping, the Central Bank of Nigeria (CBN) yesterday closed the Retail Dutch Auction System, (RDAS) for a managed floating exchange rate regime that will require it determine the rate at the interbank rather than demand and supply dynamics.

 

Consequently, the naira which has lost about 17 percent since an official devaluation in November 2014 shifted the midpoint from N155 to N168, with a wider band of ± 5 percent has become a managed float with the CBN intervening in interbank market when there is volatility.

The development, regarded as a tacit devaluation of the naira by some analysts, is also seen as another drastic move to check widespread arbitrage of N46 existing between the official rate of N168/$ and the parallel market rate of N214/$ as at last night.

Besides, it is expected to reduce the malpractices occasioned by various definitions adduced to the prefered sectors which enjoyed the official rate by some importers, as only the CBN will manage the rate at interbank.

But manufacturers said last night that the action is capable of destroying the sector that is currently reeling under different challenges.

“Given the fact that oil prices are falling, we all say there is the need to diversify the economy. But how can you diversify without manufacturing,” says Frank S.U. Jacobs, president, Manufacturers Association (MAN).

However, Razia Khan, managing director, Head, Africa Macro Global Research, Standard  Chartered Bank, London said, “It is better news for importers, as it means that the uncertainty over whether a type of FX demand is admissible at the RDAS or not is no longer relevant.However, for importers that did previously benefit from the subsidised FX rate, the feedthrough from a weaker FX rate will now be immediate.”

Johnson Chukwu, managing director, Cowry Asset Management limited, said the “closure implies the introduction of a floating exchange rate regime for the naira. With this policy, the exchange rate will now be largely determined by the forces of demand and supply, with the CBN intervening to correct market imperfections.

“However, given the structure of the Nigerian economy, where 90% of our foreign exchange earnings come from crude oil sales, which are received by the CBN, it will still maintain a near monopoly position in the supply of forex to the interbank market.

The benefit of this policy is that the economic rent, subsidy and arbitrage which a few economic agents have been enjoying from accessing funds via the official window has now been eliminated.”

Chukwu further observed that the harmonisation of exchange rates around the interbank rate  would lead to further depreciation of the exchange rates, as well as increase in the cost of production for most real sector operators who have been sourcing their forex needs from the official window. He adds, “We should expect an uptick in inflation rate as a result of this policy.”

Ayodeji Ebo, Head, Investment Research, Afrinvest Securities limited  said, “We expect this decision to increase the cost of imported inputs for the FMGCs, as input cost increases, hence reduced profit margin. Investors are expected to price-in the new development into the share prices of the FMGCs when taking investment decisions.”

Ebo observed that the new ‘one-way quote’  would compel banks to carry out the expected intermediation role, as they will forfeit the spread earned on forex trading as offer will be filled on “demand basis”.

“This decision will force the banks to look more inward and focus on real banking generating activities, so as to improve their bottom line. On the economy, this decision may reduce the pressure on the exchange rate in the interim however, the foreign investors will remain wary of foreign exchange risks in view of a depleting external reserves, he said.”

The CBN, in a statement by Mu’azu Ibrahim, director corporate communications, last night said, “ The managed float exchange rate regime, which the bank had adopted following the liberalisation of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.

“In recent times however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the bank has observed a widening margin between the rates in the interbank and the rDAS window, thus engendering undesirable practices, including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.” This has continued to put pressure on the nation’s foreign exchange reserves, with no visible economic benefits to the productive sector of the economy and the general public.

“In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves. Consequently, we wish to inform all authorised dealers and the general public that with effect from the date of this press release, the rDAS/wDAS foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the Interbank Foreign Exchange market.”