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       Monday, October 16, 2017       
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NES OBSERVATIONS ON THE NEW CBN SINGLE FOREIGN EXCHANGE MARKET

The President of the Nigerian Economic Society (NES), Professor Ben Aigbokhan at a symposium on the management of the Naira held at the University of Uyo, Uyo on 14 July 2016, presented the Society\'s position on the current Foreign Exchange Policy of the CBN.

Background to the New Exchange Rate Policy
• The prevailing harsh economic realities which posed
challenges to much of received wisdom on how best to
manage the exchange rate.
i. Foreign exchange reserved dropped from $42.8 billion in
January 2014 to $26.7 billion in June 2016.
ii. Collapse of crude oil price on international market from
$110 pd to below $30 pd in early 2016.
iii. With the recovery of crude oil price toward $50 pd,
production level fell dramatically from earlier level of
2.5 mbpd to 1.8 mbpd due to vandalism.
iv. Consequently, some 70% loss in foreign exchange earnings
from crude oil, foreign exchange inflow fell from monthly
$3 billion to less than $1 billion
v. Meanwhile, forex demand rose astronomically over the
years. Import bill rose from monthly $148 billion in 2005
to $915 billion in 2015. So, demand for dollar very far
outstripped supply.
• Some initial measures were taken to address the situation.
i. Daily limit on forex cash withdrawals from ATM outside the
country was pegged at $300. Annual limit was pegged at
$150,000 and later lowered to $50,000.
ii. Profit and capital repatriation became a challenge. The
aviation sector was a loud testimony on this.
iii. With official rate fixed at $/N197, parallel market rate
moved toward 400. No doubt the fixed rate at N197, the
situation gave room for rent-seeking and round-tripping.
• Thus, a review of policy was inevitable.
i. There was a suggestion for a managed flexible exchange
rate with appropriate band, a position I canvassed in
January 2016.
ii. There was a call for fixing the exchange rate at midway
between the official rate and the parallel market rate at
N250/$.

Key Features of the New Forex Regime
• Merging of autonomous and interbank markets into a single
market.
• Breaking the monopoly supply of foreign exchange by CBN,
• Creating room for market-determined exchange rate of naira
as instead of the CBN rate.
• Introduction of FXPDs who can act as wholesale channels.
• Introduction of spot and forward dealings in the forex
market.

Implications of the New Foreign Exchange Regime
• It will allow for a realistic market determined value of
naira exchange rate, as it brings about the true value of
naira.
• It will enhance liquidity in the foreign exchange market.
• It will bring about reduction in the spread between
official market and parallel markets rates,
• The introduction of forward trading will allow buyers and
sellers to hedge against risk, and therefore reduce
speculative activities in the market.
• It brings stability to the naira exchange rate in the
medium run term unlike CBN fixed induced artificial
stability
• In the short-run naira may suffer loss in value, this
should be temporary
• Overall, the new regime will ease pressure on price level,
thereby bring down inflation rate and its costs.

Suggestions by NES
• CBN should approve the number of organisations/agents that
meet its requirements which are stringent enough to
prevent all comers;
• NES is concerned with factors that can make the policy to
succeed:
o Policies that will harmonize monetary and fiscal
policy decisions, particularly with respect to
liquidity in the economy;
o The need for promotion of local production;
o CBN intervention in areas that can enhance local
production - SME, manufacturing firms, energy supply;
• CBN should not focus only on supplying dollars into the
market as intervention, but also buy from the market with
the objective of using it to stabilise the exchange rate
of the naira when the need arises.

Professor Ben E. Aigbokhan, Ph.D.
President, Nigerian Economic Society

Posted in News by Admin
Tue, July 19, 2016

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