Applaudise?? CBN New Policy

Hands up- Market now decides- Make i rest biko

The long awaited announcement have been made. Finally, the Central Bank of Nigeria frees the Naira and hands over the Naira exchange rate to be purely determined by the market. Although, the central bank can step in at anytime when appropriate. While its a sigh of relief to others as it is seen as an opportunity to win back investors into the country, a lot of people are still of the opinion that this will eventually have a bad effect in the long run.
For those who are still trying to understand what this policy stands for, read below what blogger Feyi Fawehinmi has to say about this new policy.
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Today, the CBN went all the way to a float. To be clear, nobody ever floats their currency willingly — you are always forced into it. An example was ‘Black Wednesday’ which forced the UK to float the Pound in 1992. It was painful and embarrassing but you won't find anyone who wants to go back to pre-1992 here anymore.

The CBN has introduced something ‘new’ to the market, however. A new creature to be known as Foreign Exchange Primary Dealer (FXPD) has been created. CBN released a separate set of guidelines for these creatures.In the club, these FXPDs are the guys who will sit in the VIP section with CBN. If forex is champagne, these creatures will be served first before anybody else. But don’t panic, this is a good thing.

These guys are not going to be dealing in small small stuff. Minimum is $10m to sit in this club. That is, to buy dollars from the CBN, they will have to quote in batches of $10m. But remember CBN is no longer going to be the sole source of dollars — so these creatures will also get to buy from oil companies and exporters.

What will they do with all that money? From the FXPDs, the money will flow downwards till it gets to you or anyone else who needs it. Not every bank will qualify for this FXPD creature status — the VIP section can only take so many people. So banks who are not FXPDs will get to buy from FXPDs.

What of Bureau De Change? They are not even allowed in the club talk less of sitting in the VIP section. Having said that, I’m told that people sometimes jump the fence to enter clubs in Lagos. Or stand outside the gate hoping to be let inside at some point. Ultimately, they will get money but only after it has flowed down from CBN to FXPDs to Non-FXPDs. Don’t cry for them — they will be ok.

These FXPD creatures can be kicked out of the VIP section by the CBN if they misbehave. I imagine no one wants to leave the VIP section to mingle with the sweaty masses on the crowded floor so hopefully, they behave. But there will always be that one fly who is not satisfied just watching the dead body being lowered into the grave…

So the big question is; How will people in Nigeria cope with this new policy? Read more...

If you leave the currency to market forces, in theory, you can just wake up one morning and the currency has dropped by 50% ke? In theory, yes, in practice, no. When a currency moves about wildly, that is a risk. This risk brings up different opportunities for risk management products. Imagine you’re a guy who needs to order a container from America in November this year. You know the exchange rate today but you don't know what it will be in November. You can leave it in God’s hands and take whatever the rate is in November when you need to pay.

But maybe the rate is N350 to $1 today and you think it will rise to N400 to $1 by November when you need it. To avoid that, you buy a hedge for N350 to $1 to pay out on the day you need it in November. This service will not be free —you will have to pay a fee for it. But it guarantees that one the day you need the dollars in November, you will get it at N350 to $1. Remember that you can’t see the future (well, maybe you have ‘washed’ your eyes sha) so on the appointed day in November, it might be that the dollar is actually N320. Sorry. You still have to pay the N350 you agreed to and you have lost money.

10 Things About The New Normal

Given the above, what will the future be like? In no particular order

1. This is good for governors and states. For April, the 3 tiers of government shared a total of N281.5bn. We know that this money was changed from dollars at around N199 so working backwards, this gives us $1.4bn that was available to share (some of the money is VAT which is in naira but let’s keep it simple). States and LGs got N144.2bn of that money or $725m if we work back to dollars. Now we know that the ‘real’ rate was around N350 at the time. But let’s say the interbank market settles at N310 when it opens, this means that the states and LGs would have gotten N225bn instead of N144.2bn they got. This is a big difference given that these states have been running around begging for money.
2. That said, a lot of these states are owing money in foreign currency for the foreign loans they have taken. To repay those loans, they have been converting their naira at the official N199 rate. Now they will also have to pay the interbank rate of N310 to buy their dollars. A state that has a lot of foreign currency loans will not see much of a difference from the new rate. But if you notice that your governor starts ‘carrying shoulder’ it might mean that your state doesn't have too many foreign loans and is now ‘liquid’ as Nigerians like to say.
3. What of the federal budget? This will help the FG in the way it helps states above. If nothing else, it will be easier for it to pay salaries now and spend money on anything else that does not require imports. Last week, the government announced the Home Grown School Feeding Programme. An initial N93bn has been budgeted for the programme. Given that this is a priority programme for the government and most of the costs are in naira (if not all), there should be more funds available for the government to pursue programmes like these.
4. Petrol nko? When the N145 price was announced last month, it was said to have been calculated using a rate of N285 to $1. This is Nigeria’s biggest forex expense so it will be sensitive to whatever the exchange rate is. So what if the interbank rate goes above that? It’s an interesting question. But, until foreign investors return from their holding formation outside Nigeria, CBN will still be the biggest source of dollars in the market. I suspect (this is just my guess) that the CBN will keep one eye on the fuel price when selling its dollars to those FXPD creatures. At any rate, a few days ago, the petrol marketers cabal were wailing in the papers that petrol demand has dropped by 40%. There is only so much Nigerians can take so any further price increase will be met by reduced demand by Nigerians. I imagine that everyone is now watching their petrol usage more closely. Very good. The business of smuggling petrol across the border to Cameroun and Benin Republic is also now dead as the dodo bird. As long as the government holds its nerves and minds its business, Nigerians should be able to deal with the marketers themselves.
5. Quite a number of Nigerian companies (mostly oil and gas) borrowed from Nigerian banks in foreign currency. It is one thing to borrow money when oil is $100/barrel, it is quite another thing to repay that same money when oil is $50/barrel. At the end of 2015, CBN said the total amount of bad loans in the banking system — where the borrower is not making repayments — was N650bn. A few days ago, CBN released updated figures up to the end of April 2016. The bad loans in the system are now a shocking N1.38trn. If CBN is openly confessing to N1.38trn, do you think the actual number is higher or lower? Don't forget that banks have already written off some of these bad loans. First Bank reported an 82% drop in profits for 2015 mainly because it had to put N119bn worth of loans on standby to go bad. It has promised to sack 1,000 workers to balance the books. Some of these bank debtors with foreign currency loans were still managing to get dollars at N199. Now that they will have to pay market rate, the bad loans in the system can only rise. Which means more job losses at banks. You have to feel sorry for people who will lose their jobs. But some of these banks need to learn a hard lesson and there is no other way to do it than this way.
6. And inflation? Latest numbers from the Nigerian Stats agency shows that inflation is running at 15.6%. If the exchange rate goes up officially, surely this can only mean prices of things will go up further stoking inflation right? Well, it’s not that straightforward. The truth is that hardly anyone was getting dollars at the N199 rate anyway. Most imported goods are already priced at the black market rate. My hunch is that the dollar will settle at a lower rate than it currently is so this new rate might even lead to slightly lower prices. Nigeria is also a poor country so you can’t keep increasing prices and expect people to take it. At some point, people will find alternatives or just eliminate that demand. I will stick my neck out and say inflation will go down from here.
7. There is a huge backlog of forex demand that remains unmet. This amount has been growing for a while now and some say it is now between $6bn — $9bn. The most ‘popular’ group in this constituency are the foreign airlines who now have around $600m trapped in Nigeria. Once the market opens next week, it will be like opening prison doors for prisoners — these guys will inundate the market and increase pressure on the naira. Unless CBN has some special plan to meet this likely demand head on (sauces tell me they have), the exchange rate may spike before it settles later. Keep calm. Once the mess is cleared, things should settle down.
8. Even though CBN will be in VIP section selling dollars to the FXPD creatures, from time to time, it will wander out into the main club and sell dollars if it feels the rate is doing wan kain. What is a Nigerian forex policy without a new acronym? We now have something the CBN calls Secondary Market Intervention Sales (SMIS). That is, it will sell dollars directly to the main market where FXPDs and Non-FXPDs trade just to keep things stable.
9. If you need dollars, just go to your bank. If you want PTA or BTA or whatever you call it, just go there with your ticket and ask for it. If you need to pay school fees, just fill whatever form you need to fill. Those 41 items are still banned so if you want to import them, you will need to buy from the black market. But the days of dollar scarcity where you wanted PTA and couldn’t get it should be over. Whatever the supply of dollars is, the price will now reflect it. You will also see that export proceeds will ‘shoot up’. Those exporters who have been avoiding bringing back their export proceeds will now do so. So those export proceeds that have supposedly been collapsing, according to CBN, will be mysteriously revived now.