CBN’s unified exchange rate rattles investors, traders

By AYOOLA OLAOLUWA

The recent unification of all exchange rates by the Central Bank of Nigeria (CBN) has put players in the Nigerian foreign exchange market on the defensive, forcing many of them, especially traders and speculators to tread with caution, Business Hallmark can report.

Many FX traders, it was learnt, were caught unaware by the sudden implementation of the policy, which collapsed all exchange rates into the Investors and Exporters (I&E) window and allows market forces to determine exchange rates.

President Bola Tinubu, it would be recalled, had in his inaugural address on May 29, vowed to put an end to the multiple forex rates policy he inherited from the previous administration.

According to the president, a unified exchange rate would redirect funds into meaningful investments that will power Nigeria’s economy.

“Monetary policy needs thorough house cleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy”, the president had declared.

Meanwhile, many stakeholders were caught napping by the sudden announcement and immediate implemention of the unified exchange rate policy.

The traders, thinking the implementation was going to be gradual, were busy going on with business as usual, when the Central Bank of Nigeria (CBN), in a circular on Wednesday, June 15, signed by its Director of Financial Markets, Angela Sere-Ejembi, announced the scrapping of all exchange rate segmentation with immediate effect.

Sere-Ejembi said the operational changes to the foreign exchange market also include the re-introduction of the Willing Buyer and Willing Seller model at the Importers & Exporters (I&E) Window.

“Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007.

“All eligible transactions are permitted to access foreign exchange at this window”.

She added that applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, and SMEs would continue to be processed through the I&E window in Deposit Money Banks (DMBs).

The announcement sent the financial market into a frenzy, with many players running for cover.

The unlucky ones who had betted against the naira to keep crashing to the black market level had their fingers severely burnt.

According to BH checks, the nation’s currency has continued to defy all odds by appreciating against the dollar after initially crashing to N702.19/$1 on the first day of trading.

On Thursday, June 15th, the second day of trading, the naira reached a peak of N790 to the dollar at the investors and exporters (I&E) window, before appreciating to N664 at the close of trading.

According to data from FMDQ Securities Exchange, the trend continued on Friday, June 16th, with the naira further appreciating to N663/$ at the close of business.

The unexpected rallying of the naira, multiple sources in the foreign exchange market informed our correspondent, led to early traders and speculators incurring heavy loses.

According to the sources, most traders had betted heavily on the naira going on an uncontrolled spiral fall.

“Sincerely, no one thought the naira will quickly stabilise, not to talk of appreciating.

“Even several International financial and rating agencies had projected that naira will likely hit N900/N1,000 if the CBN allowed the FX market to be dictated by market forces.

“Armed with these projections, some traders, particularly the exuberant ones, had foolishly quoted higher figures while bidding for the greenbacks.

“Unlike before when rates were fixed by the CBN, buyers and sellers of foreign currency are now allowed to quote rates they find comfortable with the new policy.

“For instance, what Mr. A quotes, is not what Mr. B will quote since they don’t know each others minds.

“So, the sell and buy rates are determined by the volume demanded and supplied.

“Except for desperate importers, who needed to get FX for urgent needs like the purchase of raw materials and machineries, most traders are studying the market with bated eyes.

“This will continue for some time until we have a true picture of things. Those that bought at a premium are holding on to it while hoping naira will sooner or later falls. If they sell now, they will be doing so at a loss”, declared Temilade Fasua, a forex dealer based in Lagos.

The continued appreciation of the naira against foreign currencies, BH reliably gathered, is partially attributed to low demands.

“Apart from those that urgently needed FX, most buyers, especially speculators are waiting out the market.

“Many, who had bought at the official rate of N460, while hoping to sell at a premium of N740 and above, are now bringing out their stocks out of fear that naira will continue to appreciate, especially when Dangote Refinery starts to pump petroleum products and earn FX”, another source, who did not want his identity revealed disclosed.

In the same vein, black marketers have also limited the purchase of foreign currencies from sellers, preferring to err on the side of caution.

A typical forex trader at the front of Justrite Supermarket at Abule-Egba, Tijani Hussein, lamented that business had been slow since the CBN introduced the unification policy on Wednesday.

“Unlike before when we buy dollar, pound sterling and euro for keep, we now buy what will last us for a maximum of two days as we don’t know the direction of the market the next day.

“We had thought that if the official exchange rate is fixed at between N600 and N700, our own rate will move to about N900 or N1,000. But the reverse is the case. The convergence point is about N80.

“It is now that I believe the argument of the suspended CBN governor that the actual market value of the naira should be around N600/N650, and not the N750 black market rate”, Hussein noted.

In what looked like a tacit agreement with the CBN, American bank, JP Morgan, predicted that the naira will settle in the “high N600s” in the coming months.

The financial institution made the prediction in a statement while reacting to the unification of all segments of the forex exchange (FX) market by the apex bank.

“While it will take a few days for USD/NGN spot to settle, we fully expect an initial overshoot towards the parallel market rate of N750 or higher, after which, we expect USD/NGN to settle in the high N600s over (the) coming months.

“We remain long USD/NGN via non-deliverable forwards (NDFs) as well as emerging markets bond index global diversified (EMBIGD) index as we expect further positive catalysts to materialise in the near-term.

“We believe there is room for incremental positive surprises with respect to reform depth and execution speed.

“We had high expectations for the new administrations reform agenda, however, the speed of execution has proven to be a positive surprise”.

The financial institution also stated that as more flows are redirected through formal banking channels, the naira will experience appreciation in the near term, leading to a convergence between the I&E rate and the parallel market rate.

Also, the International Monetary Fund (IMF) applauded the exchange rate unification policy, noting that it stands by and supports its implementation.

“The Fund 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”, IMF’s Resident Representative in an Nigeria, Ari Aisen, said in the statement.

In her own comment, an analyst with CRW Stockbrokers, Hadassah Isaac, said the unification of the forex rates had given all investors a level ground to access dollars.

“The market is very happy because of the president’s announcements. We have seen the private sector celebrating the devaluation of the naira. It is a positive move.

“But our major concern is the sustainability of the policy. Do we have enough liquidity in the system to take care of the demand?

“How will the system be funded? Will people bring out the dollars they have been hoarding”, she demanded.

Meanwhile, commercial banks have continued to update their customers on how to access their FX needs under the new regime.

In separate emails to customers made available to BH, two of the banks, Polaris bank and UBA noted that the updates followed the new foreign exchange policy of the CBN.

“These changes apply to all new and existing Form A and Form Q transactions”, Polaris bank advised in a mail to one of her customers.