The central bank (CBN) injected $86 million in the official window to support the supply side as the Nigerian naira continues to deteriorate due to a sustained slide in the foreign currency market.
The FMDQ price methodology modification has resulted in the Naira exchange rate being stable at around N15,000. Over the course of the last four months, the central bank has prevented the US dollar from being sold directly at the spot market, where currencies are exchanged for instant delivery.
“The model of willing buyers and sellers in the forex market could be detrimental to a country that relies heavily on imports and has relatively inelastic demand for foreign exchange, meaning that this could mark the beginning of the apex bank’s periodic intervention in the market again.” said a top economist.
Recently, Mr. Yemi Cardoso stated that the exchange rate will be determined solely by forces of demand and supply. The CBN chief went ahead with the initial series of FX reforms.
The apex bank action came as part of an effort to tackle liquidity challenges, combat market distortions, and promote transparent pricing in the foreign exchange market. On January 29th, the apex bank told authorised dealers to conduct transactions on a ‘willing buyer willing seller’ basis.
Monetary policy authority, a circular, accused local deposit money banks of FX-related infractions discovered from an ongoing investigation. This directive aimed to eliminate under-reporting of FX transaction rates and ensure transparent pricing, Agusto Ratings said in a note.
To support the willing buyer and seller model, the Financial Market Dealers Quotation (FMDQ) Exchange amended the pricing methodology of foreign exchange transactions, resulting in a ‘price correction’ at the Nigerian Autonomous Foreign Exchange Market (NAFEM).
The CBN also told Banks to reduce their Net Open Position (NOP) a move to prevent excessive holding of foreign currency assets, something that has allowed banks to profit massively from FX revaluation gains in recent years. The new directive stipulates that the NOP must not exceed 20% short or 0% long.
Although it is unclear to what extent, it is widely acknowledged that most banks currently have significant long foreign currency positions. Available data indicates a surge in FX liquidity from $134 million on January 31st to a 19-month high of $844 million on February 5th on the back of these measures that have enabled the naira to trade more freely against the dollar.
To save the market from unorthodox FX practices and clean the table, the monetary authority began to pay back the forex backlog. It discovered that the backlog was overstated by $2.2 billion. To extend its reform coverage, the CBN also mandates all inbound money transfers to Nigeria to be paid in Naira, further impacting recipients who prefer or require US dollar payouts.
According to analysts, the policy could influence remittance channels used by Nigerians abroad and is likely to pose challenges for individuals and businesses accustomed to IMTOs for outbound transfers.
