The Central Bank of Nigeria (CBN) intends to aggressively mop up liquidity surfeit in the nation’s banking system before unveiling any new foreign exchange (FX) policy, BusinessDay has learnt.
Godwin Emefiele, Governor of the CBN said on May 24 the bank would introduce a flexible exchange-rate regime in Africa’s largest oil producer “in the coming days.”
BusinessDay reported exclusively yesterday that President Muhammadu Buhari on June 02, gave monetary authorities the go ahead to begin implementing their plans to re-introduce flexibility in Nigeria’s foreign-exchange market.
Sources familiar with the matter tell BusinessDay that because the naira liquidity in the banking system is large, most of the idle funds would end up being used to trade in the FX market once the interbank market is re-opened.
“In order to reduce funds available for targeting the FX market, the CBN would need to mop up this excess liquidity, using Open Market Operations (OMO),” a government source said.
Offering attractive OMO rates and long tenor bills in the market can help achieve this outcome, market sources tell BusinessDay.
The CBN has in the past expressed concerns about excess liquidity in the banking system.
“The major challenge with the current liquidity surfeit is that it is not translating to improve private sector credit. It is equally feared that this might eventually drive pressure in the foreign exchange market, thus a need for sterilisation,” Adelabu Adebayo, a deputy governor of the CBN said.
Nigeria’s private sector credit increased on annualised basis, by mere 8.70 percent at end -February 2016 against an annual CBN target of 13.28 percent, while between the last week of January and end-February 2016, the average inter-bank and OBB rates were 1.43 and 1.26 percent, respectively.
Comparing the market rates with the Monetary Policy Rate (MPR) of 12 percent strong hints of liquidity surfeit in the banking system.
“In the face of low money market rates and apathy towards private sector lending, the inter-bank foreign exchange market would likely become the ultimate destination of the banking system excess liquidity that had continued to put pressure on our exchange rate and become a fertile ground for market bubbles, “Suleiman Barau, deputy governor, Operations Directorate at the CBN said.
The government and the Central bank expects that once excess liquidity in the banking system is cleared and other factors such as the backlog of FX demand (estimated at $4 billion), expected inflows of $2.5 billion from a Chinese Bank and an African Developmental Finance Institution, among others are dealt with, the interbank FX market will resume the usual price-driven quotation using Reuters Order Matching System.
Market sources tell BusinessDay the Reuters system is reliable and trustworthy because it shows the real time price offers being made by FX traders, and therefore removes the noise and dissatisfaction around the present order-based two-way quote system.
BusinessDay gathered from government sources that a key aim of the new FX policy of the monetary authorities would be to unlock more inflows into the market, by relaxing rules which currently prohibit non-oil (mainly agricultural produce) exporters from selling their FX proceeds outside the interbank market.
Remitters of diaspora fund, foreign private and foreign direct investors are expected to sell their funds to the interbank market to improve supply.
Government officials believe these could lead to an additional $2.6 billion inflow from export proceeds, while diaspora remittances could rise by $950 million over the next 12 months, sources say.
A concern in the market however, is that moving non-oil export proceeds outside the interbank FX market could give legitimacy to the parallel markets.
Meanwhile, speculators who are betting against the naira as the market awaits new flexible FX rules will get their fingers burnt, Nigeria’s Central Bank and Bank Chief Executive Officers warned on Thursday.
The much awaited FX framework occupied discussions at the 327th Bankers Committee meeting – a gathering of bank CEOs, CBN officials and some other financial authorities- which held yesterday at the CBN headquarters in Abuja.
Phillip Oduoza, CEO, UBA, said the CBN has already sought and received a lot of inputs from stakeholders.
He said those inputs are now being distilled in order to build a robust framework that would address critical concerns around FX management in the country.
While the market anxiously waits for the guidelines, rising speculations on the naira, led to its depreciating at the parallel market to over N360/$ on Thursday.
“I want to state that whoever that is involved in currency speculation because you are waiting for the model and as such causing a depreciation of the currency is probably going to be deceived at the end of the day,” warned Oduoza.
“This is because once this model is released, you find out that a lot of the issues that have been affecting foreign exchange issues in Nigeria, probably not all, will be dealt with. I believe that people need to be very careful.”
BusinessDay