New CBN FX window brings naira closer to equilibrium

New CBN FX window brings naira closer to equilibrium

The Central Bank of Nigeria (CBN) last week moved forward in its reform process as it jettisoned its grip on the naira and let the market set the naira rate on a new FX window, which should see it trade closer to equilibrium.

The Apex bank announced on Monday that the new FX window will cater mainly for invisible transactions such as loan repayment, loan interest payments, Dividends, /Income Remittances, Capital Repatriation, Management Services Fees and Consultancy fees.

The new rules excludes International Airline Tickets Sales Remittances, Bills for Collection and any other trade related payment obligations.

Analysts and economists had hitherto said that a market determined exchange rate would ease liquidity flow and invigorate the supply side of the market.

Such a policy is urgently needed as investors and fund managers have jettisoned naira assets because of capital controls imposed by policy makers.

The central bank banned foreign exchange sale to importers of 41 items from its official FX market window in order to stop in the continued bleeding of the external reserve and stabilize the economy.

A sharp drop in the price of oil since mid-2014 undermined external the reserve and stoked severe dollar shortages that rattled manufacturing and banking sector.

The economy of Africa’s most populous nation capitulated to the aforementioned challenges as it shrank 1.50 percent in 2016 according to data from the National Bureau of Statistics (NBS).

Nigeria’s external reserves in the last one month have gained $222 million between Monday March 13, 2017 and Wednesday 12, April, 2017 as it closed at $30.416 billion, latest data from the Central Bank of Nigeria (CBN) website show.

As at April 10, 2017, the statistics showed that reserves stood at $30.39 billion, representing an increase of over $30 million compared to $30.29 billion as at end of March 2017.

While the central bank in June last year adopted a flexible exchange rate after pegging the naira at N197-N199 for 15 months, the policy has neither solved manufacturers’ FX challenges nor increase investor appetite to the country’s assets.

It would be recalled that the Abuja based bank had pegged the naira at N197-N199 for 15 months despite the huge gap between the interbank rate and the parallel market rate.

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1 Comment

  1. Folake Vaughn
    August 31, 2017 at 1:11 pm Reply

    I find this article confusing. Currently, in order to obtain funds to pay for imported goods the importer applies to his bank for approval of the Letter of Credit, which is then queued up. After typically 2-4 months the importer gets an allocation (usually covering part of the value of the Form M) as forward payment of 30 or 60 days at the interbank rate of N325.5/USD. Eventually, the total amount is allocated, the waiting period ends, and the LC can be established (say, 6 months after the processed was started). The attractiveness of this is that the interbank rate of N325/USD is 12% cheaper than the NAFEX rate, with the drawback that the money has been tied for the period.
    As a summary, the interbank rate and the NAFEX rate have not converged, as Bloomberg and BussinesDay claim.

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