The CBN took the measure following severe pressures on external reserve and foreign exchange supply crisis.
Governor of the CBN, 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.
In the face of severe pressures on external reserves and foreign exchange supply crises, the CBN abandoned its fixed rate policy in favour of a flexible and multiple market model, which implied a floating exchange rate regime.
The apex bank’s Monetary Policy Committee, MPC, which made this decision, chose 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. Details of the new foreign exchange market policy, according to the CBN Governor, Mr. Godwin Emefiele, would be released in due course.
He, however, said 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 sometime now, is revitalised on unrestricted exchange rate basis, while the Bureaux de Change, BDCs, would continue their operations, thus creating multiple exchange windows.
He, 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.”
Policy implications
By the new exchange rate regime, CBN would allow the Naira to float against the US dollar at the inter-bank market, rather than holding on to a fixed peg.
What this means, however, is that buyers of foreign exchange for importation of goods, holiday, school fees, medical tourism, online payments etc, will have to source from the inter-bank market-determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt.
By this development, the parallel market would have been suppressed, while there would be a near rate convergence among the different market segments except the special window.
It also means that round tripping and arbitrage have been curtailed. However, exchange rate is expected to spike, even as many dealers have already speculated that rates would go up by over 50 per cent today.
Analysts at Nairametrics said yesterday: “It is unclear how this will work as the CBN will need to put a massive structural operational framework in place to ensure this works perfectly.
“A market determined rate will also require strong regulations around a market that involves everyone with prices that are market determined.
“One expects the black market to disappear as all you need to do is walk to the bank and ask to buy forex at the market rate.” Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it.
“Any real liberalisation would be accompanied by some tightening, as a stabilisation measure, at least in the short term,” said Razia Khan, Chief Africa Economist at Standard Chartered in London. “That does not appear to have been considered. This is at best curious, at worst very worrying.”
Reacting to the development, analysts from Cowry Assets Management Limited said: “The CBN adopted a more flexible exchange rate policy. A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand.
“In our opinion, the policy decisions will impact the economy on several fronts: We expect current inflationary pressure will continue unrestrained as budgetary disbursement commences. Also, Interest Rate is expected to continue to hover at current levels with an increased double digit outlook. Likely increase in liquidity mop up through Open Market Operation in response to expected increase in budgetary spending. Naira will remain under pressure ,as market forces adjust the fixed CBN’s clearing rate to a more realistic parallel market rate. There will likely be foreign exchange inflows from domiciliary accounts estimated at USD20 billion as currency exchange risk minimises and capital market activities expected to witness gradual recovery as foreign exchange risk diminishes, with the adoption of a more flexible exchange rate regime.”
Inflation to spike further
However, analysts at Vetiva Capital Management expect inflation to spike in the near term. They said that “it is clear that the MPC has chosen its battle carefully, deciding to loosen one of the key impediments to economic growth (the FX illiquidity). Following from this, we expect the inflation picture to worsen in the near term as a result of the emergence of a new exchange rate to consumer prices. Like we had noted in our April inflation note, we expect inflation to recoil in 2017 from base effects. We believe this view could have further emboldened the MPC’s resolve to adopt the more flexible FX framework.”
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