Thursday, June 16, 2016 8:46AM /FBNQuest Research
The CBN has exceeded our own, and most expectations with the more flexible exchange-rate policy it promised in the communiqué after the meeting of the monetary policy committee on 24 May.
The speech yesterday by Governor Emefiele and the two sets of new operational guidelines published on the website amount to bold steps. The tightly managed rate and the idea of special access for “critical transactions” are dropped. They will be replaced by an interbank market in which new primary dealers will transact with the CBN on large trades (of US$10m minimum for spot fx, for example).
The CBN will participate in the interbank market and through what it terms secondary market intervention sales (SMIS). Its position as the largest single seller into the market clearly brings some influence over the exchange rate.
The NSEASI soared by 3.2% yesterday. The market had some time to reflect on the governor’s speech, and may have concluded that the new policies would bring back the offshore portfolio community.
The governor said that the CBN’s monthly earnings had fallen below U$$1.0bn from as much as US$3.2bn in 2013 (before the latest oil price slide). The question then becomes whether the new policies will generate the fx to meet (easing) import demand in a contracting economy.
The authorised dealers, who are to transact with the primary dealers, are to purchase the proceeds of international money transfers as well as foreign investment inflows (direct and portfolio). This is a welcome step to capture some of the flows of remittances, which total US$21bn annually.
Additionally, the guidelines show that the CBN hopes to smooth out spot fx demand with new fx forwards and futures products.
The new system may be market-driven but it is not unsupervised. The governor gave the familiar warning that the CBN will not permit speculation. Interbank funds cannot be sold to the bureaux de change.
The 41 import items listed in the CBN circular of June 2015 remain ineligible for fx from the new market. At the time, we cited an estimate that it reduced official monthly fx demand by US$900m. We also pointed out that the then exchange-rate policies sat uncomfortably with the FGN’s call for import substitution, which would be advanced by a more competitive rate (more expensive US dollars).
The governor indicated that trading on the interbank market would open on Monday and the futures market subsequently. We would expect some clarifications on these modalities in coming days.