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FX REFORMS TRIGGER HOPE FOR $60B RESERVES TARGET


Collins Nweze
 * 
 * 
 * 

July 19, 2023

The Central Bank of Nigeria (CBN)-led reforms in the forex market has raised the
hope of dealers and market players on the possibility of growing the foreign
reserves to $60 billion by year end. Domestic and foreign investors see reasons
for committing more capital to the economy, boosting the foreign reserves and
supporting exchange rate stability. The fallouts are expected to enhance the
approval ratings of financial sector regulator in the eyes of the investment
community, writes Assistant Business Editor, COLLINS NWEZE.



The floating of the naira, which ended decades of multiple exchange rate regime,
has been described by the domestic and global investment experts as courageous
and long overdue.



They believe it is one of the many steps needed to transform the economy and
attracting foreign capital that will not only strengthen the naira, but also
push the foreign reserves to $60 billion by year end.

For many forex (FX) dealers and financial markets players, the exchange rate
unification project, which saw the Central Bank of Nigeria (CBN) collapse
exchange rates – the International Air Transport Association (IATA) rate,
parallel market rate, Interbank Exchange Rate and Bureaux De Change (BDC) rate –
into the Investors & Exporters (I&E) window, was good.

The policy shift entailed that dollar applications for medicals, school fees,
Business Travel Allowance/Personal Travel Allowance, and Small and Medium
Enterprises (SMEs) are processed through the I&E window- where rates are
determined by market forces.

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The policy narrowed the premium between official and parallel market rates,
which is the first major consideration for foreign direct investment inflows.

In a circular to authorised dealers, the CBN Director, Financial Markets, Angela
Sere-Ejembi, abolished the exchange rate segmentation.



She said the segments were collapsed into the I&E Window.

She said the changes to the foreign exchange market also include the
re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.

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

According to the circular, the rate for government-related transactions shall be
the weighted average rate of the preceding day’s executed transactions at the
I&E Window, calculated to two decimal places.



“Proscription of trading limits on oversold FX positions with permission to
hedge short positions with OTC futures Limits on overbought positions shall be
zero. Re-introduction of order-based two-way quotes, with bid-ask spread of N1.
All transactions shall be cleared by a Central Counter Party (CCP).
Re-introduction of Order Book to ensure transparency of orders and seamless
execution of trades. The hours of trades shall be from 9am to 4pm, Nigeria
time,” the circular said.

Managing Director, Afrinvest West Africa limited, Ike Chioke, said the forex
reforms by the CBN has raised hope on sustainable economic development.



He said the spike in forex rate at the parallel market would be short-lived as
more foreign investors pump dollars to the economy.

He said the naira would face pressures at the parallel market but that would be
for a short time. He further said the bigger picture is that more foreign direct
investments would comeinto the economy. “The forex reforms has rekindled hope of
domestic and foreign investors in the economy, and we expect it to pay out
positively on the naira and foreign reserves in the long run,” he said.



Managing Director, Afrinvest Consulting, Abiodun Keripe, said the reforms were
courageous, and were previously thought impossible.

He said the reforms had opened the possibility of Nigeria growing the foreign
reserves from about $36 billion to $60 billion by year end.

- Advertisement -

He said achieving the target would require increased oil production, boost in
diaspora remittances, sustenance of tax and oil subsidy reforms by President
Bola Tinubu administration.

Keripe said implementing the reforms would also strengthen the naira from  about
N550/N600/$.

President, Association of Bureaux De Change Operators of Nigeria (ABCON) Alhaji
Aminu Gwadabe, said the removal of the rate cap at the I&E Forex Window allow
for a true market clearance rate, which had been the agitation of stakeholders.

He said the move would harness and increase various sources of supply of
Greenback  like foreign portfolio investment, Foreign Direct Investment,
Diaspora remittances, export proceeds, among others.

“The new directive,” he said, “is to checkmate various illegal economic
behaviours like rent seeking, currency substitution, forex holding positions and
frivolous demand in the market.”

He said forex dealers were awaiting the official rule of engagement to fully
explore the benefits of the polciy.

Gwadabe predicted tht there would be initial panic and mild spike in the market
that would push levels up but that will be short lived.

“Secondly, in the medium term, we will begin to see our sources of dollars
inflow increasing in the market to provide the needed liquidity in the market
for rates stabilisation. Being a definite free market structure as supplies
increase the rates will definitely come to settle down at a level of N600/650 to
the dollar with somehow a very little margin in both market,” he said.



He said the challenge of liquidity injection into the market should be resolved,
with bureaux de change operators expected to play major role.

“In solving this problem, The BDCs are primarily licensed for to formalise them,
and deepen the market liquidity. The BDCs also  provide the role of reducing
spreads between buy and sell offer rates which help the stability of the naira.
I, therefore, advise the Acting CBN Governor to leverage the BDCs on Disapora
remittances that is huge, cheap and constant to harness, and achieve their
desired objectives of market liquidity. They should continue to demonopolise the
market by making BDCs the exclusives agent of pickup agencies of Diaspora
remittances proceeds,” he said.

Also, former Executive Director, Keystone Bank, Richard Obire, said the apex
bank should promote transparency in the forex market through the exchange rate
unification move.

He said the eradication of the multiple exchange rates would bring about
increased dollar supply, and exchange rate stability.

“Local banks are being told that the naira’s exchange rate against the dollar
will be determined through supply and demand rather than by the central bank,”
another senior banking official said. The bankers had said they were expecting a
strong depreciation of the naira at the official spot window.

Applauding the forex reforms, traders at Balogun Market, Alaba International
Market, Trade Fair, Lagos and Aba Market, Aba, Abia State said the exchange rate
unification has ushered in more competition, and level-playing field for
imported products.

An importer at the Balogun Market, Lagos, Bartholomew Okafor, claimed that the
dollars he spent on importing foreign fabrics was sourced from the black market.

“We have only seen marginal depreciation at the black market, which is not
strong enough to significantly change the prices of our goods. We expect the
naira to gain and recover to position of strength in the coming months,” he
said.

Continuing, he said the advantage people that source dollars from the official
market have over others is no longer applicable.

“Everybody will get the dollar at almost same rate. That humongous gap between
the official and parallel market is gone for the sake of fair trade,” he said.

Other analysts said those expecting a major spike in inflation figures would not
see it because a large part of the dollars in the economy is sourced from the
black market.

Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said
it is expected that the reforms would crystallise later.

“Although the exchange rate seems to be volatile at the I&E FX window, it is
expected that it will become more stable in the coming months while converging
to the parallel market rate.

“However, external reserves will remain constrained as oil prices sustain their
bearish outlook. Headline inflation is expected to rise due to the impact of
fuel subsidy removal on transport and food prices. As inflation continues to
trend upward, the Monetary Policy Committee (MPC) is likely to hike interest
rates at its next meeting in July.

Martins Maduka, who trades at the Trade Fair Market, also welcomed the new
policy. He said whereas Nigerians might be expecting inflation because of the
new policy, it might have the opposite effect, saying that inflation would drop
over time.

The International Monetary Fund (IMF) also expressed support for the foreign
exchange rates unification policy.

It pledged to give the government the required  tunic to ensure the success of
the forex reforms.

The IMF, in a statement in Abuja by its Resident Representative in Nigeria, Ari
Aisen, said  it “greatly welcomes the authorities’ decision to introduce a
unified market-reflective exchange rate regime in line with our long-standing
recommendations.

“We stand ready to support the new administration in its implementation of FX
reforms.”

Fiscal Policy Partner and Africa Tax Leader at PwC, Taiwo Oyedele, said with the
I&E Window policy, the government’s revenue would rise, resulting in higher
taxes, revenue to Gross Domestic Product (GDP) ratio. It will also lead to a
reduction in budget deficit and some cost savings for government.

“With the naira exchanging in the official forex market at market-determined
rates, a significant market distortion has been removed. Expectedly, the impact
on diaspora remittances would be marginal, the capital market will benefit as it
is likely to appreciate further as foreign investors take position, there should
be negligible impact on the general prices of goods and services as products
already factored in parallel market rates to a large extent. Overall, this is a
positive move,” he said.

Continuing, he said  the government needs to manage the dynamics to restore
confidence, adding that the backlog of forex demands needs to be addressed and
that the government should be ready to supply forex to stabilise the exchange
rate in the short term.

Oyedele added: “The government also needs to relax capital control and
administrative bottlenecks, including unbanning the list of items prohibited for
forex (and complement with higher import duties), remove the need for
certificate of capital importation, among others, to prevent the parallel market
rate from simply moving further away from the official market rate. Stop the
demand for certain taxes and levies in foreign currency, it creates unnecessary
forex demand without adding to supply.”

CEO of Moniepoint, Tosin Eniolorunda, said the CBN’s decision to float the naira
is a  step in the right direction for our economy, ensuring investor confidence
continues to grow.

Applauding the reforms, Eniolorunda said:  “The decision is good for business,
jobs and growth. It will help Nigeria’s entrepreneurs to do business globally
and attract foreign investment. It will also help reduce inflation, leaving more
money in people’s pockets.”

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