Yesterday, News Punch reported that the Federal Government through the Central Bank of Nigeria has adopted flexible exchange rate regime
The CBN said the new policy is aimed at making foreign currencies more accessible.
Briefing newsmen after the meeting, the Governor of CBN, Godwin Emefiele, confirmed the development.
Emefiele said on Tuesday that with the directive, the CBN would in the next few days release a new guideline on the management of foreign exchange in the country.
He said following the recent depreciation in the country’s foreign exchange, time has now come for the bank to introduce greater flexibility in the management of foreign exchange.
He said while the country awaits the new policy to be unveiled soon, the bank would only fund critical transactions such as importation of vital machinery for production as well as essential basic raw materials that are critical for manufacturing, which by their nature cannot be sourced locally.
As earlier reported on Tuesday by The Eagle Online, the new development will see the CBN selling the Dollar to Naira at about N250 to $1.
At present, the official exchange rate is N197 to $1.
By the new exchange rate regime, CBN would allow the Naira to float against the US dollar at the inter-bank market, rather than holding on to a fixed peg, Vanguard Newspaper says
What this means, however, is that buyers of foreign exchange for importation of goods, holiday, school fees, medical tourism, online payments etc, will have to source from the inter-bank market-determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt.
By this development, the parallel market would have been suppressed, while there would be a near rate convergence among the different market segments except the special window.
It also means that round tripping and arbitrage have been curtailed. However, the exchange rate is expected to spike, even as many dealers have already speculated that rates would go up by over 50 per cent today.
Analysts at Nairametrics said yesterday: “It is unclear how this will work as the CBN will need to put a massive structural operational framework in place to ensure this works perfectly.
“A market-determined rate will also require strong regulations around a market that involves everyone with prices that are market determined. “One expects the black market to disappear as all you need to do is walk to the bank and ask to buy forex at the market rate.” Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it.
“Any real liberalisation would be accompanied by some tightening, as a stabilisation measure, at least in the short term,” said Razia Khan, Chief Africa Economist at Standard Chartered in London.
“That does not appear to have been considered. This is at best curious, at worst very worrying.” Reacting to the development, analysts from Cowry Assets Management Limited said: “The CBN adopted a more flexible exchange rate policy. A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand.
“In our opinion, the policy decisions will impact the economy on several fronts: We expect current inflationary pressure will continue unrestrained as budgetary disbursement commences.
Also, Interest Rate is expected to continue to hover at current levels with an increased double digit outlook. Likely increase in liquidity mop up through Open Market Operation in response to expected increase in budgetary spending. Naira will remain under pressure, as market forces adjust the fixed CBN’s clearing rate to a more realistic parallel market rate.
There will likely be foreign exchange inflows from domiciliary accounts estimated at USD20 billion as currency exchange risk minimises and capital market activities expected to witness gradual recovery as foreign exchange risk diminishes, with the adoption of a more flexible exchange rate regime.”
However, analysts at Vetiva Capital Management expect inflation to spike in the near term. They said that “it is clear that the MPC has chosen its battle carefully, deciding to loosen one of the key impediments to economic growth (the FX illiquidity). Following from this, we expect the inflation picture to worsen in the near term as a result of the emergence of a new exchange rate to consumer prices. Like we had noted in our April inflation note, we expect inflation to recoil in 2017 from base effects. We believe this view could have further emboldened the MPC’s resolve to adopt the more flexible FX framework.”
Excerpted From Vanguard News