The CBN Governor, Godwin Emefiele, made the announcement on Wednesday in Abuja at a briefing to unveil the Framework for Re-introduction of Managed Float Exchange Rate System.
He said the re-introduction of a flexible inter-bank exchange rate market will restore the automatic adjustment mechanism of the exchange rate.
He said the workings of the market will then be consistent with the Bank’s objectives of enhancing efficiency and facilitating a liquid and transparent Foreign Exchange Market.
Emefiele said that the primary dealers would be chosen from existing FX dealers based on the volume of foreign exchange transactions they have handled before and must have a minimum capital of $10 million.
He said the level of liquidity, the extent to which those dealers have complied with CBN’s regulations in the past, their level of preparedness in terms of being able to provide all the soft and hardware needed to operate would also be conditions to determine their qualification.
“The market shall operate as a single market structure through the inter-bank and autonomous window. The Exchange Rate will be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.
The CBN will participate in the Market through periodic interventions to either buy or sell FX as the need arises.
To improve the dynamics of the market, we will introduce Forex Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis.
These Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines, which would also be released immediately,” he said.
Emefiele said the 41 items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN Circular remained inadmissible in the Nigerian Forex market.
He also said the CBN had introduced a non-deliverable Over The Counter (OTC) Naira-settled Futures with daily rates on the CBN-approved Trading and Reporting System.
He said this was an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market.
“This is an innovation which we have introduced to moderate volatility in the FX market. It is a situation where it makes it easy for you as a businessman to plan your business at the rate you want to do your business.
You do not have to fear that what is happening to crude prices will affect the rate you source your dollar in say three months when you need it.
So with this new policy you can decide that I have pegged the price of the FX I need at `x’ and you log it to the futures rate with the primary dealers.
If in the next three months, the rate you agreed in locking your future deal is N260 to a dollar and the market is doing N270 the CBN will make up for the N10 gap.
So this will ensure that you do not lose money by waiting three months to procure your FX. What that does is that we want to see how this shifts demand from spot to the time when you truly need it.
This will discourage people that need dollar in the next three to nine month to stop asking for dollar on spot, thereby putting pressure on the demand for the dollar at the spot market today,” he said.
Emefiele said the new policy became necessary to deal with the effect of the drop in international oil prices and global growth slowdown which had impacted negatively on the country’s economy.
“In view of these headwinds, the CBN witnessed a significant decline in our Foreign Exchange Reserves from about 42.8 billion dollars in January 2014 to about 26.7 billion dollars as of June 10, 2016.
In terms of inflows, the Bank’s foreign exchange earnings have fallen from about 3.2 billion dollars monthly to current levels of below a billion dollars per month.
Despite these outcomes the demand for foreign exchange has risen significantly. For example, in 2005 when we had oil prices at about 50 dollars per barrel for an extended period of time our average import bill was N148.3 billion per month. In stark contrast, our average import bill for 2015 was about N197.6 billion per month.
Unfortunately, the interplay between reduced FX supply and rising FX demand accounted for a substantial reduction in our foreign exchange reserves,” he said.
Emefiele said that selected FX Primary Dealers would be notified by Friday, June 17. All other non-Primary Dealers would remain valid and eligible to participate in the market.
He said the Inter-bank trading under the new guidelines would begin on June 20 while the tenors and rates for the OTC Naira-settled FX Futures would be announced on June 27.
He reiterated the apex bank commitment to make the market as transparent, liquid, and efficient as possible.
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