The Central Bank of Nigeria, CBN, yesterday declared a flexible exchange rate regime. This is aimed at making foreign currencies more accessible. In other words, the CBN has annulled the official exchange rate regime of N197/dollar. To explain this further, the fixed exchange rate of N197/dollar will no longer obtainable in any bank in Nigeria.
According to today’s vanguard report, the CBN took the measure following severe pressures on external reserve and foreign exchange supply crisis. CBN Governor, Mr. Godwin Emefiele, who announced this at the end of the Monetary Policy Meeting, in Abuja, also said the Monetary Policy Rate, MPR, was retained at 12 per cent; Cash Reserve Ratio, 22.5 per cent; and Liquidity Ratio, 30 per cent.
Following the severe pressures on external reserves and foreign exchange supply crises, the CBN abandoned its fixed exchange rate policy in favour of a flexible and multiple market models, which implied a floating exchange rate regime. The apex bank’s Monetary Policy Committee, MPC, which made this decision, choose to retain its Monetary Policy Rate, MPR, at 12 per cent, Cash Reserve Ratio, CRR, at 22.5 per cent and Liquidity Ratio at 30 per cent. According to the CBN Governor, Mr. Godwin Emefiele, details of the new foreign exchange market policy, would be released in due course. He, however, added that the apex bank would retain a special window to fund critical transactions in foreign exchange, which would likely attract a concessionary rate. By this development, the interbank foreign exchange market, which has been dead for some time now is revitalised on unrestricted exchange rate basis, while the Bureaux de Change, BDCs, would continue their operations, thus creating multiple exchange windows. The Governor however, ruled out any consideration for channelling foreign exchange to the BDCs. Briefing the media after the MPC meeting, Emefiele explained that “the MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate,” adding that it voted also to “retain a small window for funding critical transactions” and that “details of operations of the market would be released by the Central Bank at the appropriate time.”
What is the fate of commercial banks on this new exchange rate regime?
Most of the bankers that spoke to Vanguard appear unsure of what the market direction would be today or this week in respect of foreign exchange trading. President of the bank treasurers’ association, Mr. David Adepoju, said bankers would not trade outside the existing policy as CBN had not rolled out the details of the new policy. According to him, if the apex bank allocates foreign exchange on the basis of the existing policy which fixed exchange rate at between N197 and N199 to USD1, the banks would stay on that official rate. There would possibly be dual rates in the banks where the official rate might persist on foreign exchange supplied by CBN at the official rate.
What are the implications of this new exchange rate regime?
- Exchange rate is expected to spike. You can expect the inflation picture to worsen in the near term as a result of the emergence of a new exchange rate to consumer prices. Naira will remain under pressure as market forces adjust the fixed CBN’s clearing rate to a more realistic parallel market rate.
- The possibility that this will work is uncertain even as the CBN need to put a massive structural operational framework in place to ensure it works perfectly.
- The expectation that black market will disappear as all you need to do is walk to the bank and ask to buy forex at the market rate is actually unpredictable.
- Commercial banks are likely going to work under dilemma unless the CBN comes out with a baseline exchange rate and ways of implementation.
- Expect Interest Rate to continue to hover at current levels with an increased double digit outlook.
- The special window will give room for an abuse. It will create distortion in the economy.
Whether the new flexible exchange rate of CBN will in a long run lead to a stabilization in exchange rate is a question that I cannot answer until CBN spell out the full details of the new policy.
Updated on 5th June 2016: Details of the new foreign exchange market policy, according to the CBN Governor, Mr. Godwin Emefiele, would be released in due course.
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