By Emeka Okoroanyanwu
UNEASY calm seems to have returned to the foreign exchange market, notable previously for its volatility. Within one week of the introduction of the new foreign exchange policy by the Central Bank of Nigeria (CBN), the naira predictably slumped to N282.50 to US $1. Before the introduction of the policy on Monday, the naira had been pegged at N197 to one US dollar for over sixteen months even though it had been trading at over N320 per dollar for months on the black market. It sits at N345 per dollar in that segment of the market.
For the one week the new foreign exchange regime has been in place, the Nigerian currency has gained relative stability. Activities in the market early part of last week were characterised by cautious trading as end users of foreign exchange adopted a wait-and-see attitude. This gave rise to early euphoria by some optimists who felt that the market had gained stability in response to the new policy. But by middle of the week, that early optimism gave way to trepidation as many end users had entered the fray. Dealers complained that demand was beginning to outstrip supply, as the naira recorded some losses, closing N284/USD1.00, down from the N281.85 it closed on Monday.
What dampened the market was the inability of expected suppliers of forex, mostly oil companies to push in enough currency for purchase by ever thirsty buyers. This forced the CBN to intervene with USD4.02 billion for both the spot and the futures market. The CBN pushed USD532 million into the spot market on Monday while the balance went to the futures segment. But by Tuesday, the apex bank injected only $150 million, thus necessitating the scramble. Even at that, the liquidity squeeze had become noticeable by Wednesday.
This prompted a sharp increase in interest rates especially at the interbank market. As at Tuesday, the interbank overnight rate had spiralled to 60 per cent as banks expected the CBN to debit them about N1.15 trillion for the Monday and Tuesday transactions even as they were accused of amassing more Naira cash for wednesday’s and future trading days. This analysts feared would extend the liquidity challenge, thus bringing much pressure to bear on interest rates.
Such pressure, money market dealers explained midweek would push up cost of funds across all segments if it lingers for more days. Investigations revealed that over N1.5 trillion was pushed into the inter-bank foreign exchange transactions in the just two days.
The scramble for the local currency triggered a depreciation in both the spot segments of the market midweek. Data from FMDQ showed that the naira depreciated in the spot market by N2.98 or 1.1 per cent to N284.85 per dollar, from N281.85 per dollar on Monday. In the futures market, the naira depreciated across board. The exchange rate for seven days forward rose by 10.5 per cent to N2.84.83 per dollar, from N257 Monday. 14 day futures rose by 9.3 per cent to N292.3, while 1 month futures rose by 7.6 per cent to N302.12, 6 month futures rose by 4.5 per cent to N302.13, One Year (1Y) futures rose by 0.5 per cent to N307.95 per dollar. However, the Naira appreciated in the parallel market. Consequently, interest rate rose as banks more than doubled their purchases. On Tuesday, interest rates rose by an average of 165 per cent and by Wednesday had averaged 33 per cent.
Sources revealed that interest rate for overnight lending shot up to 74 per cent on Wednesday in some segments of the interbank market, while the Financial Market Dealers Quote (FMDQ) disclosed that average interest rate for overnight lending rose to 68.5 per cent, from 51 per cent on Tuesday, while interest rate for securitised lending rose to 63.3 per cent from 45 per cent on Tuesday.
In order to stabilise the market and contain the liquidity squeeze, the CBN was reported to have opened its discount window on Wednesday to allow banks use their treasury bills to borrow cash. This, however, was not confirmed by Sunday Sun.
The CBN had on Monday introduced a new foreign exchange regime tagged, “automatic adjustment mechanism of the exchange rate.” CBN Governor, Godwin Emefiele had revealed while unfolding the new policy, two sets of operational rules. While the former idea of access for critical transactions rate were discarded for CBN intervention in the interbank market in which new primary dealers would transact with the apex bank on large trade volumes of US$10 million minimum for spot forex, the apex bank would participate in the interbank market and through what it termed secondary market intervention sales (SMIS).
Thus, as the largest single forex contributor in the market, CBN’s intervention was expected to usher in a period of relative calm in the market.
Emefiele who lamented that the CBN’s monthly earnings had fallen below US$1.0 billion from as much as US$3.2 billion in 2013, before the fall in the price of oil, said the new policy would boost supply of foreign exchange to the market and reduce pressure on the naira. Though market driven, but not supervised by the CBN, Emefiele had warned that interbank funds cannot be sold to bureaux de change.
The Central Bank revealed that the naira peg would be abandoned and the currency allowed to float freely.
Godwin Emefiele made it clear that even though the rate would float freely now, CBN may from time to time intervene as the need arises. The bank said it would still maintain a single market structure, thus abandoning its 16-month naira peg of N197 to US$1. Many analysts see the CBN facing a Herculian task in its arduous task of managing the foreign exchange market especially with the crash in the price of oil in the international market. As at May this year, official inflation rate for Nigeria was 15.6 percent. Some analysts have also opined that a managed, floating exchange-rate regime is ill-suited for a country with weak institutions and little discipline, like Nigeria.