CBN: Naira Is Now Free To Market Forces

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The Central Bank of Nigeria (CBN) collapsing the regulated and the unofficial foreign exchange windows into one entity was won by advocates of market forces.

CBN Governor Godwin Emefiele said in Abuja:

“There is one window and that is what it will be. As long as there is one window, whatever comes out at the end of the day as the marginal rate will be the rate that is recognised officially by the world. I do not expect that another rate will be recognized in the market.”

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He said under the new flexible exchange rate market initiative, the CBN has pegged the minimum amount primary dealers are required to trade in at $10 million.

The spokesman for the apex bank, Isaac Okoroafor, told The Nation that what the CBN had done was not a devaluation of the currency, but that the apex bank had left the naira/dollar exchange rate to market forces for determination. He said if the CBN had devalued as some are wont to argue, it would have stated by what margin, or percentage it devalued the naira. “This is in no way a devaluation,” he said.

Highlighting the framework and operational guidelines of the flexible exchange rate regime, Emefiele said the market shall operate as a single market structure through the inter-bank/autonomous window, stressing that the Exchange Rate would be purely market-driven, using the Thomson-Reuters Order Matching System, as well as the Conversational Dealing Book.

The apex bank will participate in the market through periodic interventions, to either buy or sell forex as the need arises. “We will introduce FX Primary Dealers (FXPD) to be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis; These Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines", the CBN governor said.

The flexible exchange rate initiative also includes that :there shall be no predetermined spread on FX spot transactions executed through the CBN intervention with Primary Dealers.

While all FX Spot purchased by Authorised Dealers are transferable in the inter-bank FX Market; the “forty-One (41) items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN Circular shall remain inadmissible in the Nigerian FX market.

Emefiele said the CBN may offer long-tenored FX Forwards of six to 12 months, or any tenor to Authorized Dealers to enhance liquidity in the market.

The sale of FX Forwards by Authorized Dealers to end-users must be trade-backed, with no predetermined spreads..

Emefiele said the regulator shall introduce non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System.

This, he said, “is an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market.
Emefiele underlined the resolve of the CBN to, as he put it, “make this market as transparent, liquid, and efficient as possible. Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders.”

He warned that “the CBN will not allow the system to be undermined by speculators and rent-seekers. Any attempt to breach any aspect of this new framework will be heavily sanctioned by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing licence of an offending authorised dealer.”