Challenged CBN Releases Flexible Forex Guidelines This Week

 • Industry assets now at  N27.43tn

James Emejo in Abuja, Obinna Chima in Lagos   

Any time this week, which analysts believe may be Friday, when the Central Bank of Nigeria usually takes bids from authorised dealers of foreign exchange, the apex bank will unveil its much awaited guidelines on flexible foreign exchange regime.

This is coming after two weeks of intensive consultations with major stakeholders, including investors, bankers, fund managers and money market operators in a bid to strike an equilibrium and produce a workable policy that will bring price stability to the naira.

The CBN had been heavily hamstrung by dwindling oil revenue receipts, brought about by the violent activities of militants in the Niger Delta, which have reduced the country’s monthly oil sales income from the all-time high of $3.2bn just 15 months ago to about $500,000 in April.

Experiencing great difficulties in funding the nation’s imports as a result of scarce foreign exchange, a situation that had put a heavy pressure on the naira, sending it on a free-fall, the CBN had to think up a workable solution that would open up the forex market while maintaining a robust forex reserve.

The dilemma for the apex bank, however, is how to hold on to the current reserves level of about $28bn and maintain price stability in the foreign exchange market in the face of dwindling oil receipts.

The dollar is currently trading at N365.

“I think the guidelines would be released latest by Friday,” a source very close to the apex bank told Thisday on Sunday.

At the last monetary policy committee (MPC) meeting held 20 days ago, members agreed to hold all policy rates constant and introduce greater flexibility in managing forex rate. As a result of this, a lot of investors were cautiously optimistic and indeed excited.

The CBN Governor, Godwin Emefiele, had said the central bank resolved to introduce greater flexibility in the foreign exchange market structure and to retain a small window for critical transactions for prospective investors.

“With the foreign exchange market framework now ready, the MPC voted unanimously to adopt greater flexibility in the exchange rate policy to restore the automatic adjustment properties of the exchange rate,” he had explained.

Since then, the central bank has been consulting with stakeholders in the economy on the policy.

Actually, the Chief Executive Officer, Financial Derivatives Company Limited, Bismarck Rewane, had predicted that the much awaited guidelines might be released today.

Rewane, also known for his research works for the apex banking institution, had in a report to the Lagos Business School earlier in the month predicted today as the most likely day for the release of the guidelines for the flexible exchange rate policy.

But Bismarck had stated that a flexible exchange rate policy would have a long term impact of attracting capital inflows. “CBN is preparing guidelines but caught between a rock and a hard place. External reserves minus arrears are lower than desirable. There is the fear of a run as soon as cap is removed. Funding sources for a second forex window in doubt,” he said.

Creating possible outcomes on the planned flexible exchange rate, he predicted that the critical window rate could be N220/$; Interbank – N280/$ and parallel market– N320/$.

On their part, analysts at Afrinvest West Africa Limited, in a report at the weekend said it expects that the CBN would adopt “a crawling band system which will consist of an adjustable official rate at which the Bank intervenes and a corridor around the rate to moderate fluctuations in the interbank market.”

“This would still be marked improvement over the current fixed peg system but concerns would still remain on how the CBN would be adjusting its intervention rate (i.e. would it toe the parallel rate in lockstep manner or be fixed?) and how wide the width of the (a) symmetric corridor would be,” Afrinvest added.

Speaking in an interview with THISDAY, the CEO of Maxifund Securities Limited and a former CEO of the defunct Citizen International Bank, Mr. Okechukwu Unegbu, said the decision to introduce a flexible exchange rate was because of the weakening macroeconomic environment.

“We have tried so many types of exchange rate systems in this country. From the Wholesale Dutch Auction, Retail Dutch auction, and several others. From my understanding, the flexible exchange rate system means that our forex policy would be in tandem with developments in the economy.

“If the economy is strong, the central bank would want the exchange rate to be in tandem with the state of the economy at that time and if the economy is weak, they would want to adjust it. But the central bank is very right by not following the International Monetary Fund and World Bank advice to devalue our currency.

“There are reasons for devaluation and one of it is that you want to have more volume in your export, but here we don’t have anything to export. IMF and World Bank policies do not suit our environment,” he added.

Meanwhile, the CBN has stated that the sustained low crude oil price and supply constraints at the foreign exchange market as well as other macroeconomic conditions impacted negatively on the quality of bank loans, raising their non-performing loans (NPLs) ratio to 10.1 percent in April 2016.

The current ratio is well above the prudential limit of five percent and further raises concerns over banks’ asset quality.

According to the apex bank, the implementation of the Treasury Single Account (TSA) caused a decline of N1.02 trillion in banks’ total deposits, which dropped to N17.51 trillion in April 2016 compared to N18.54 trillion in April 2015.

Also, industry total assets decreased by 0.6 percent or N158 billion to N27.43 trillion in April 2016 from N27.58 trillion in the corresponding period of 2015.

According to the CBN, industry Gross credit fell 0.3 percent to N13.36 trillion in the period under review compared to N13.40 trillion the previous year.

According to figures provided by CBN Deputy Governor, Economic Policy, Sarah Alade, industry Cash Adequacy Ratio (CAR) further deteriorated to 16.5 percent in April 2016 from 17 percent in 2016 following decline in the total qualifying capital-occasioned by regulatory deductions, retirement of Tier II capital, impairment as well as increase in the total task weighted assets.

In her presentation to the Bankers’ Committee on the state of the economy and update on the regular Monetary Policy Committee (MPC) meeting, a copy which was obtained by THISDAY,  banks’ unaudited profit before tax for the period ended April 2016 decreased by 10.8 percent or N24 billion to N198 billion from N222 billion in 2015.

She said bank’s return on equity (ROE) and return on assets (ROA) both fell to 2.17 percent and 16.17 percent in 2016 from 2.42 percent and 19.39 percent respectively.

“The decline was driven largely by a decrease in both interest and non-interest income, which declined by 6 percent or N50 billion and 5.4 percent or N259 billion respectively,” she stated.

It further emerged that industry liquidity ratio (LR) stood at 46.3 percent in 2016 compared to 39.78 percent in 2015-and showed that banks operated far above the minimum requirement of 30 percent.