On Monday, 20th of February 2016, the Central Bank of Nigeria issued a new forex policy on its website. It called it “New Policy Actions in the Foreign Exchange Market.” Whilst we expected a new forex policy to be announced anytime soon, we never expected it this soon. Just last week, the National Economic Council had requested for a review of the current forex policy citing the huge disparity between the official and parallel market rates.
This was after the CBN Governor, Godwin Emefiele (or Emefailure) as some will like to call him, made a brief presentation on Forex Policy options. He later responded to their concerns suing for “patience and understanding, assuring that the situation is being closely managed.” Mr Emefiele, finally responded with a new policy.
What you need to know
- The Central Bank’s latest policy is directed at the retail end of the market where the scarcity is worst. This is the market that used to be served by the BDC’s
- The CBN is therefore focused on supply of dollars to the following people;
- Personal and Business Travel Allowances – Forex for those who need it to travel on holiday or business
- Medical needs– People who need forex to pay for medical services abroad
- School fees – People who need forex to pay for their school fees or for school fees of their wards schooling outside Nigeria.
- If you fall into any of these categories, you are qualified to get forex
- To ensure that you get the Forex whenever you want, the CBN also said it will be selling Forex to All banks. Emphasis on “All Banks” because unlike the last policy, no bank is exempted from buying forex from the CBN and selling to you.
- The CBN however said that each bank would receive amounts commensurate with their demand per week. This basically means, the bank that gets patronized the most from customers will get the most dollars from CBN. Also, note the fact that the CBN will be selling dollars per week.
- This sounds like a free market but I won’t jump at it yet, after all its Emefiele.
- To ensure that anyone and everyone who is qualified for PTA and BTA gets it, the CBN has also directed all banks (again emphasis on all) to open FX retail outlets at major airports “as soon as logistics permit.”
- As logistics permits means, banks don’t have a timeline to open outlets at various airports. This is a double-edged sword as banks with outlets could sell at a premium. The more banks available to sell, the cheaper it is to buy, that’s according to the laws of demand of supply. We know forex in Nigeria hardly meets that law.
- Major airports here refer to the three major international airports we have in Nigeria. Lagos, Abuja and Kano. With Abuja Airport set to be closed, it is likely that Kaduna airport will soon be an FX destination.
- This means, all banks without an outlet at our “major airports” will not joining the likes of Travelex, UBA, First Bank, GTB, Zenith to sell forex to consumers.
PTA and BTA
- For those who wish to buy BTA and PTA the CBN will be requesting that banks get you to submit “basic documentary requirements.” We understand this refers to things like BVN, International Passport, Ticket, Visa, Boarding Pass etc.
- Same thing you submit when you want to get dollars via Travelex
- It did not mention whether you forex for PTA and BTA will be sold only at airports
School & Medical Fees
- The CBN also said it plans to meet the needs of parents, guardians and sponsors who are seeking to make payments of school and educational fees for their children and wards.
- Meaning that all you need to be is a sponsor to access forex if you want to pay school fees for anyone.
- Unlike that of the PTA and BTA where you will get the cash directly, the CBN will not be giving those looking to pay for school or medical fees forex directly.
- The CBN says forex will be made by commercial banks directlyto the institution specified by the customer, in the case of school fees.
- For medicals, the money will be paid directly to hospitals.
- In what appears to sound like a CBN determined to ensure continuous supply in the retail end of the market, it insisted that supply to the retail end of the market where people who need PTA, BTA, School fees, medical bills, etc. would be sustained by the CBN.
- That word sustained is very important as it means CBN is committing to supply that segment of the market with dollars.
What about price?
- Contrary to what you may have read in the Newspapers, the CBN did not mention any exchange rate in its press release.
- However, it instructed banks to sell forex at a rate not exceeding 20% above the interbank market rate.
- In other words, if the interbank market is trading at N375, then banks can sell to you at a price as high as N450. This in effect is a devaluation of the Naira.
- The CBN also asked banks to settle at a “much more competitive exchange rates” also suggesting that it wanted banks to sell at whatever price the demand requires.
- On Manufacturers, the CBN said it will remain its “strong priority” even though it had botched the 60:40 rule that means 60% of forex went to manufacturing concerns or using its words those who engage in importation of raw materials, plant and machinery.
- The CBN also promised to clear the backlog of Forwards, reducing them from 180 days to 60 days. FX forwards are dollar sales made to foreign entities such as airlines looking to repatriate money from Nigeria at a future date.
What it did not say
- The CBN did not mention the word BDC, Bureau de Change or Float
- Though it alluded to a more “efficient market” it did not mention the word float.
- The CBN also did not use the word “Fixed” or “Managed”, two words that in the past have been associated with exchange rate.
- The CBN did not use the word “dealers” of “authorized dealers” which suggest that it was only going to be using banks to address the retail needs of the market. It probably won’t be selling to BDC’s or other major dealers.
- The CBN did not also mention the 41 items that have been banned from the FX market and neither did it talk about restrictions on usage of debit cards for online forex transactions.
- They also did not mention fuel importers.
So what now?
I’m sure by now you are wondering what impact this would have on the FX market, particularly the parallel market rate. Will the price drop or will it rise? It’s too early to call, however we see some red flags here and some elephants in the room. The 41 banned items, are likely to still put pressure on the parallel market rates. The other more sinister implication is that, diversions and round tripping which banks are very good at doing will continue.
Commercial banks have never to be known to stick by the FX rules so we know those at the treasury departments of banks are already salivating. They could as in the past, hoard forex and divert same to the black market. As such, it is likely that you go to the bank and they tell you they do not have forex.
In terms of price, we expect the interbank rate to cross N400 by the end of this week or early next week. In fact, a target price of N450 is foreseeable as early as next week. It could strengthen further, provided the CBN meets its promise to sustain supply and banks ignore the temptation to divert to the black market.
The CBN is solving a problem we have long identified, which is supply. However, until we float the disparity between the parallel and official rates will remain wide. N600 at the parallel market is not far-fetched. The naira hit a record N520/$1 at the black market after the announcement.