CBN Abolishes Multiple Exchange Rates, Transactions Now to Hold on I&E Window FX Rate

•Proscription of trading limits on oversold FX

•Re-introduction of order-based two-way quotes

•Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades

•Ends RT200 rebate scheme, Naira4Dollar remittance from June 30

•Stock, bond markets appreciate

•Analysts hail move

Obinna Chima, Nume Ekeghe and Kayode Tokede

The Central Bank of Nigeria (CBN) yesterday abolished segmentation in the foreign exchange (FX) market and collapsed all rates into the Investors and Exporters (I&E) window.

The central bank gave the directive in a circular titled: “Operational Changes to the Foreign Exchange Market,” signed by its Director, Director, Financial Markets, Dr. Angela Sere-Ejembi, dated June 14, 2023.

Owing to the development, findings by THISDAY showed that the spot rate of the naira depreciated by 40.78 per cent to close at N664.04 to a dollar on the I & E FX window yesterday, as against the N472 to a dollar it closed the previous day.

The market also depreciated to a record low of N750 to a dollar during intra-day trading yesterday. However, on the parallel market, the naira which had been hovering around N770 to N760 to the dollar in the past week, appreciated by N5 to close yesterday at N755/$1.

The I&E FX window is the market trading segment for investors, exporters and end-users that allows for FX trades to be made at exchange rates determined based on prevailing market circumstances, thus ensuring efficient and effective price discovery in the Nigerian FX market. The FX window was established by the CBN in 2017.

However, the CBN in latest circular, pointed out that applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks, just as it announced the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.

“Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. AlI eligible transactions are permitted to access foreign exchange at this window,” it stated.

The central bank also pointed out that the operational rate for all government-related transactions, “shall be the weighted average rate of the preceding day’s executed transactions at the l&E window, calculated to two decimal places.”

It also announced the proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC futures.

Limits on overbought positions shall be zero, it stated, while announcing the “re-introduction of order-based two-way quotes, with bid-ask spread of A1. All transactions shall be cleared by a Central Counter Party (CCP).

“Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades. The operational hours of trades shall be from 9am to 4pm, Nigeria time. Cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.

“Further guidance on these matters shall be communicated in due course. All market participants and the general public are kindly enjoined to abide by these rules,” it stated.

The stock market and the bond market welcomed the move towards exchange rate convergence.

For instance, at the Nigerian Exchange Group (NGX), the Banking Index lifted activities at the stock market by N992 billion amid perceived currency reforms. The positive trading by investors was spurred by positive investor sentiment following reports of the CBN allowing the naira to freely float at the I&E FX Window.

The NGX All Share Index (ASI) gained 1,821.51 basis points or 3.13 per cent to close at 59,985.10 basis points from 58,163.59 basis points it opened from trading.

Consequently, the market capitalisation gained N992 billion to close at N32.662 trillion, from the N31.670 trillion it opened for trading.

Sectoral performance was impressive as the NGX Banking Index gained the highest, followed by NGX Oil & gas Index.

Specifically, the likes of Zenith Bank Plc increased by 9.74 per cent to close at N33.80 per share and Guaranty Trust Holding Limited Plc appreciated by 9.42 per cent to N33.70 per share, contributing massively to the NGX Banking Index growth yesterday.

Access Corporation also rose by 9.79 per cent to close at   N15.70, while ETI gained 9.75 per cent to close at N15.20 per share.

Generally, the NGX Banking index gained 26.52 per cent, while the Oil & Gas index added 16.01 per cent, but the NGX Industrial Index dropped by 1.13 per cent.

As measured by market breadth, market sentiment was positive as 70 stocks gained relative to 13 losers.

The total volume traded advanced by 9.28 per cent to 1.297 billion units, valued at N21.080 billion, and exchanged in 11,947 deals. Transactions in the shares of United Bank for Africa (UBA) topped the activity chart with 230.764 million shares valued at N2.744 billion. GTCO followed with 125.470 million shares worth N4.205 billion, while Zenith Bank traded 119.144 million shares valued at N3.972 billion.

Access Holdings traded 92.792 million shares valued at N1.450 billion, while Fidelity Bank sold 75.621 million shares worth N494.144 million.

On the other hand, Nigeria’s sovereign dollar bonds surged as much as 2.7 cents on the dollar, with longer-dated maturities rising the most.

Analysts anticipated that the naira would stabilise in the next few days, adding that allowing the nation’s currency to float would improve forex inflows into the country.

Chief Executive Officer, Eczellon Capital, Diekola Onaolapo commended the policy, saying the new administration’s policy direction ware already reaping positive responses in the market.

 He said: “This policy is essentially setting Nigeria on the path of prosperity and wellness. It is something that has to happen and unfortunately, the previous administration didn’t attend to it because it is a very difficult decision.

“The stock has already started reacting positively and what this unification means is that people can plan both internal businesses as well as international businesses.

“On the immediate, just as the subsidy matter as well, people would feel the pain. So, when you find inflows into the country in the form of foreign portfolio investment, the influx of dollars would ultimately ease pressure on local demand for dollars and ultimately, we would reach an equilibrium. In other words, we would get to some degree of predictability and stability.”

 He added that the market would accurately reflect the true demand for and supply of the dollar within the economy. In a market-based system, the forces of supply and demand determine the price and quantity of a currency, he said.

On his part, the Head, of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, forecasted that rate would eventually converge around N600 to N650 to the dollar, but may experience initial volatility.

He said: “For every presidency, you have what you call the political honeymoon the best thing is to do everything right during your honeymoon period. It is a good policy.

“The main challenge we have in the FX market is illiquidity or inadequate supply and the reason is that the price does not reflect the fundamental price of naira. It is good that they did not peg it, but floated it. If it is implemented as planned.

“Recall that in 2016 there was an FX policy that was designed but wasn’t implemented. But if this is implemented as planned you would see a lot of FX that was outside the market come back inside. Also, those that were hoarding dollars would drop.

“Firstly, you would see that demand would drop but also those that want to legitimately buy would have access to it.”

He added that a lot of exporters who have monies outside the country would be encouraged to bring back their funds.

“It might take some time for the market to stabilise, but it is a good policy,” he added.

For his part, Head of Macro Strategy at FIM Partners, Charlie Robertson said: “A much needed devaluation which takes the currency from 50 per cent overvalued to about 5-10% (cheaper). This should improve the current account and improve the long term investment climate.”

An influential member of the President Bola Ahmed Tinubu’s advisory board, Mr. Wale Edun, had said the country would unify its exchange rates “imminently”.

While commenting on the move to drive towards exchange rate convergence, Edun, had said, “I would say it would have to be done within a quarter as rather than within a year. I think you’re talking, think quarters rather than years, that’s where I would put it.”

President Bola Tinubu had last week suspended the CBN Governor, Mr. Godwin Emefiele and had appointed Mr. Folashodun Adebisi Shonubi, as the acting Governor of the CBN.

In his inaugural speech, the president had said the country’s monetary policy needed thorough house cleansing and had expressed his desire to have a CBN that would work towards a unified exchange rate

The move towards exchange rate convergence is part of Tinubu’s Refined Action Plan that was developed by his Policy Advisory Council before he was inaugurated.

In a report by his National Economy Sub-committee seen by THISDAY, the committee had noted the existence of multiple exchange rates; FX supply shortages that remains a challenge and leaves gap between the official and parallel market window, and had fixed a period of 12 to 18 months to address the challenge when Tinubu assumes office.

Some of the initiatives identified by the committee to create a monetary environment that drives growth in the next 18 months includes the transition to a transparent, unified and market-determined exchange rate system, announce readiness of the administration to address issue of multiple exchange rates and the gap between the official and parallel markets in the President’s Inaugural Speech, review the CBN’s balance sheet and ascertain the true position of the Nigeria’s external reserves, model the potential impact of a harmonised exchange rate regime on the economy and quantify the amount of foreign reserves required to adequately support the policy, based on the backlog of unmet FX demand and associated obligations.

Others included to estimate of future FX demand for the year; and an additional contingency reserve, aggressively grow FX supply & build external reserves, including securing funding support from the Multilateral Agencies and DFIs at concessionary rates.

“An estimate of least $50-$60 billion in reserves, with a monthly inflow of at least $6 billion-$8 billion dollar per month from export earnings and other forms of capital inflow, will be required to defend the naira at an exchange of N500-N600/$.

“Remove all FX intermediation windows and allow the banks as primary dealers to supply the FX market through a willing buyer/willing seller model. Raise the capital requirements of Bureau De Change (BDC) to ensure only strong, well-capitalised and automated BDCs are allowed to operate, for example, Travelex.

“Introduce an effective exchange rate management system, viz the crawling peg. Implement policies to eliminate the barriers to attracting increased Nigeria’s Diaspora remittances. Set up strategic meetings and engagements with top emerging market/frontier investors to share the new monetary policy and build confidence in the economy

“Generate FX revenue by implementing a strategy to make Nigeria a preferred destination for businesses. Explore opportunities to strengthen the CBN governance structure and refine its operating model to enable it to operate efficiently and reduce its costs, given the expected significant future reduction in its interest earnings arising from the reduction in Way and Means facilities, going forward (CBN charges the FGN at MPR +3% on the outstanding obligations),” it added.

The committee also recommended a detailed evaluation of CBN’s current quasi-fiscal operations, review, rationalise and transfer its operations that are incompatible with the core monetary policy management to the relevant fiscal authorities, among others.