Official fine-tuning of the fx market

The CBN has fuelled conversations about exchange-rate policy with a press release on Monday and two circulars yesterday. The release pledged that the CBN would make additional fx available for school, medical and personal travel needs. It indicated that the end-users would pay rates no more than 20% above the prevailing interbank market rate. The circulars launched a sale of US$500m on a 60-day forward basis (without sectoral preferences) and fleshed out the fx retail sales.

Having read the CBN’s three documents, and specifically the pledge to develop “the programme to clear all unfilled orders”, we do not see this week’s changes as leading directly to, for example, another devaluation.

Rather, we see a fine-tuning exercise to reduce the backlog and the gap with the parallel market.

The authorities will be aware of the risks attached to raising, and then dashing market hopes in the manner of the liberalization of June 2016. They can mitigate this risk by maintaining the pace of change in the market. They have to attract sizeable autonomous flows to supplement the CBN’s fx supply if they are to restore two-way fx trading and therefore confidence among all market participants.

We are unsure about the basis of the cap of 20% above the interbank rate for retail fx sales. This does not prove that the CBN sees N360 per US dollar as an appropriate level.

The press release reveals that the rules on allocations of fx by the banks have been scrapped. Hitherto, banks had to devote 60% of their meagre ration from the CBN to manufacturing (broadly defined). This change was a surprise: manufacturing in Nigeria is still heavily reliant on imported inputs, the FGN’s programme of substitution notwithstanding, and will miss the privileged access to banks’ fx it enjoyed until this week.

Yesterday the CBN’s daily spot intervention increased from US$1.5m to US$6.0m without specifying whether this level would be sustained. Airlines and foreign portfolio investors are among the segments hoping to benefit, however marginally, from the end to sectoral preferences.

The CBN looks to meet all unfilled orders, and is adamant that arrears under matured letters of credit have long since been cleared. From the balance of payments for Q3 2016, we can see the compression of import volumes. We are not sure, however, that the CBN’s spot and forward transactions have together halted the expansion of the backlog.

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