The Floating Exchange Rate and You - FDC

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Tuesday, June 21, 2016 4:05PM / fdc

The Nigerian forex market kicked off yesterday, bringing with it lower volatility and exceptional transparency. Analysts were skeptical about promises of a floating exchange rate market, after years of all Rhetoric And No Action by policy makers.

The attached synopsis by Bismarck Rewane captures the activities of the forex market in the first day of the new dispensation.

3 Markets Fuse into One



What Happened Today?

·         Market opened at 10:00AM

·         Amount sold Σ $4.02bn

·         Spot market: $532.87m (N255/$)

·         Auction forward (90-days): $3.48bn

·         Number of dealers = 21

·         Marginal rate: N280/$


True Value of the Naira

·         Spot price Open: N255/$, Close: N281.95/$,

·         Auction/forward: N280/$

·         PPP value: N299/$

·         Parallel market: N340/$


Impact of Change

·         Market structure (perfect market)

·         Market liquidity (600% higher than April)

·         Transparency (open market/ live TV)

 

What does it mean?

·         Naira equivalent of N1.125trn mopped up

·         5.45% of money supply

·         4 months equivalent of FAAC

·         Commodity prices declining

ü  Tomatoes: N30k

ü  Rice: N13k

ü  Semovita: N2.7k

 

Transition



·         Forex policy complements trade policy

·         Forex policy not a silver bullet


State Governments are Laughing

·         Average FAAC to increase by 40% to N392bn

·         40% increase in FAAC using the new marginal rate of N280/$

·         Naira Injection = ( Forex subsidy + Fuel Subsidy ) = ( 40% + 68%) = 108%

·         Naira Withdrawal = ( Forex subsidy + Fuel Subsidy ) = ( 40% + 68%) = 108%

Effect Is Neutral

·         Increased economic activity

 
Impact


Outlook

·         No futures market until the 27th of June

·         Externals reserves will decline ($22bn)

·         Supplier and trade credit to be restored

·         State government bailouts unnecessary

·         Trade balance to improve

 

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