CBN Reverses Position, Begins FX Market Intervention
As the Nigerian naira continues to suffer from a persistent decline in the foreign exchange market, the central bank (CBN) pumped $86 million at the official window to boost the supply side.
The Naira exchange rate has continued to hover around N1500 following price methodology adjustment by FMDQ. The apex bank has over the four months halted the US dollar from selling directly at the spot market where the currencies are traded for immediate delivery.
“This could be the beginning of A return of the apex bank’s periodical intervention in the forex market as willing buyers and sellers’ model could prove destructive for an import-dependent nation with relatively inelastic demand for forex”, a senior economist told MarketForces Africa.
Mr. Yemi Cardoso recently said the exchange rate would be determined solely by forces of demand and supply. The CBN chief went ahead with the initial series of FX reforms.
The apex bank action came as part of an effort to tackle liquidity challenges, combat market distortions, and promote transparent pricing in the foreign exchange market. On January 29th, the apex bank told authorised dealers to conduct transactions on a ‘willing buyer willing seller’ basis.
Monetary policy authority, a circular, accused local deposit money banks of FX-related infractions discovered from an ongoing investigation. This directive aimed to eliminate under-reporting of FX transaction rates and ensure transparent pricing, Agusto Ratings said in a note.
To support the willing buyer and seller model, the Financial Market Dealers Quotation (FMDQ) Exchange amended the pricing methodology of foreign exchange transactions, resulting in a ‘price correction’ at the Nigerian Autonomous Foreign Exchange Market (NAFEM).
The CBN also told Banks to reduce their Net Open Position (NOP) a move to prevent excessive holding of foreign currency assets, something that has allowed banks to profit massively from FX revaluation gains in recent years. The new directive stipulates that the NOP must not exceed 20% short or 0% long.
Although it is unclear to what extent, it is widely acknowledged that most banks currently have significant long foreign currency positions. Available data indicates a surge in FX liquidity from $134 million on January 31st to a 19-month high of $844 million on February 5th on the back of these measures that have enabled the naira to trade more freely against the dollar.
To save the market from unorthodox FX practices and clean the table, the monetary authority began to pay back the forex backlog. It discovered that the backlog was overstated by $2.2 billion. To extend its reform coverage, the CBN also mandates all inbound money transfers to Nigeria to be paid in Naira, further impacting recipients who prefer or require US dollar payouts.
According to analysts, the policy could influence remittance channels used by Nigerians abroad and is likely to pose challenges for individuals and businesses accustomed to IMTOs for outbound transfers. #CBN Reverses Position, Begins FX Market Intervention
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