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CBN Loosens Restriction on Forex, Naira bounce back, Sparks Market Confidence

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naira, interest rate

CEM REPORT, FINANCE | Nigeria’s naira is making a comeback, defying recent depreciation against the US dollar in both official and parallel markets. This surge follows bold moves by the Central Bank of Nigeria (CBN) to liberalize the foreign exchange market, sending shockwaves through the financial landscape.

CBN Reform Package Rallies Naira by 8.57%

In just 24 hours, it jumped a staggering 8.57%, trading at N1,400 per dollar on the black market compared to Wednesday’s ₦1,520. This positive trend extends to the official market as well, with the naira gaining 1.85% to ₦1,455.59 per dollar at the Investors and Exporters (I&E) window.

The CBN’s decisive actions played a pivotal role in this turnaround. Firstly, they removed the foreign exchange (FX) cap on International Money Transfer Operators (IMTOs), granting them more flexibility in setting exchange rates. This move aims to incentivize IMTOs to channel their receipts transparently into the official market, boosting liquidity and potentially narrowing the gap between the official and parallel rates.

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Secondly, the CBN tightened its grip on banks’ foreign currency holdings, imposing limits to curb excessive exposure and potential speculation. This two-pronged approach, combining market liberalization with regulatory control, signals a shift in the CBN’s strategy towards a more dynamic and transparent FX market.

Recall

In a new circular (TED/FEM/FPC/GEN/001/003) dated January 31, 2024, the CBN announced a significant change in the regulations governing exchange rate quotes by International Money Transfer Operators (IMTO).

Previously, IMTOs were required to quote rates within an allowable limit of -2.5 per cent to +2.5 per cent around the previous day’s closing rate of the Nigerian foreign exchange market, according to the circular TED/FEM/PUB/FPC/001/009 dated September 13, 2023.

In a move aligning with the CBN’s commitment to liberalize the Nigerian foreign exchange market, the new circular permits IMTOs to quote exchange rates for naira payout to beneficiaries based on prevailing market rates at the Nigerian foreign exchange market. This is to be done on a willing seller, willing buyer basis.

The circular, signed by Hassan Mahmud, director of the trade and exchange department, supersedes the previous circular (TED/FEM/PUB/FPC/001/009) issued on September 13, 2023.

Under the new regulatory regime, banks are further required to compute their daily and monthly NOP and Foreign Currency Trading Position (FCTP) using approved templates.

The central bank stated that banks would also be required to have adequate stock of high-quality liquid foreign assets, including cash and government securities in each significant currency to cover their maturing foreign currency obligations.

Additionally, banks were required to borrow and lend in the same currency (natural hedging) to avoid currency mismatches associated with foreign currency risk.

CBN further directed that the basis of the interest rate for borrowing should be the same as that of lending, pointing out that there should be, “No mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.”

For Eurobonds, the central bank advised that any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond did not qualify as tier 2 capital.

Expert Insights

Market analysts are cautiously optimistic about the naira’s prospects. Charlie Robertson, head of macro-strategy at FIM Partners, highlights the currency’s unique position: “Nigeria’s currency today is the cheapest and best value of any in Africa or any of the emerging or frontier markets.” He further emphasizes, “Globally only the Japanese yen is cheaper (and that’s a pretty unique story).”

Street traders attribute the recent appreciation to a combination of factors. The CBN’s new policies have increased dollar availability in the market, while a seasonal lull in demand from Chinese buyers, major consumers of dollars, has also contributed.

ABCON President Welcomes Reforms, Urges Further Action

Aminu Gwadabe, president of the Association of Bureau De Change Operators of Nigeria (ABCON), applauds the CBN’s reforms, expecting them to “drastically reduce or eliminate” the diversion of IMTO proceeds from the official market. He anticipates “an increase in liquidity in the market which will influence exchange rate and stability positively.” However, he urges the CBN to consider including BDCs as “the third leg of the market” to ensure effective transmission of policies.

Looking Ahead: Sustainable Recovery or Temporary Fluctuation?

While the short-term outlook appears promising, questions remain about the sustainability of the naira’s rally. The CBN’s continued commitment to market-oriented reforms and effective implementation will be crucial in determining the long-term trajectory of the Nigerian currency.

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