-Sources Reveal Some Banks Are Now Openly Buying & Selling FX Above Interbank Rates
-This was after banks learnt that a commercial bank had bought FX at N390
-This may have spiked the exchange rate at the interbank market
-Official exchange rate may cross N400 if this continues
-This could have potential impact on the fortunes of banks and consumer goods businesses
-This could shakeup the Flexible Exchange Rate Policy

The exchange rate between the Naira and the Dollar hit a record low of N375/$1 at the interbank on Tuesday according to information from Reuters. This is the lowest it has reached after the currency exchanged for N365/$1 back in August 18, 2016.

According to sources with knowledge of the matter, the latest spike in rates was triggered when a major bank bought around $60m last week at a rate of N390. Other banks were surprised that the CBN governor appeared to allow the deal go through and have since begun to test the market.

For example, rather than purchase FX at the prevailing interbank rate of N315 banks break the ceiling and purchase FX at rates closer to the official exchange rate. Reports also suggest that some of the banks sell at rates close or even higher than the black market rate.

It appears thus that commercial banks may have been left frustrated by the artificial peg placed by the CBN to keep the exchange rate at between N310 and N320 and have now been embolden following information that another bank had broken ranks.

Analysts suggest this perhaps is the reason why we are seeing the narrowing of the disparity between interbank rate and the black market rates in recent days.

It’s unclear if the Central Bank is aware of this development considering that some aspect of it clearly breaches the rules set out in the new flexible exchange rate policy. Though sources, suggest the CBN Governor might be aware and could have consented to the $60 million deal going through.

Nevertheless, this appears to be a breach of the Revised Guidelines For The Operation Of The Nigerian Inter-Bank Foreign Exchange Market. For example, clause 2.1.4 of the policy states that “The maximum spread between the bid and offer rates in the inter-bank market shall be determined by FMDQ OTC Securities Exchange (FMDQ) via its market organisation activities with the Financial Market Dealers Association (FMDA).”

Clause 2.1.5 also states that “Proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by Authorised Dealers at the inter-bank rate.”

If information from our sources are correct then it appears these provisions may have been breached suggesting a broken interbank forex market.

The implication of this report if confirmed could be wide-ranging for the capital market. For example, a further depreciation of the naira at the interbank market will mean more foreign exchange losses for Consumer goods and manufacturing companies who had taken on excessive foreign currency loans. However, commercial banks are likely to continue to post record profits buoyed by a further depreciation of the naira.

This could also have potential impact on the price of fuel, which is still being subsidized by the CBN at rates below N300. The CBN has often being blamed for creating a fragmented market which has seen the Naira exchange for about 6 different rates creating massive opportunities for arbitrage.

http://nairametrics.com/fx-policy-under-threat-as-banks-buy-dollars-about-above-interbank-rates/ lalasticlala, dominique, Mynd44, Seun

The economy would have been on the path to recovery by now if they respected the laws of economics.
The West figured this stuff out decades ago. Why won't we learn from them? Do we think we are smarter?

Silently observing

Seun:
The economy would have been on the path to recovery by now if they respected the laws of economics.
The West figured this stuff out decades ago. Why won't we learn from them? Do we think we are smarter?

Defending the currency is like a 'patriotic' duty for any citizen of a particular country, including the United States. There are so many dynamics with respect to how countries defend their currencies, from deliberate actions (like China) to indirect actions (like the developed countries).

The West figured that developing a robust institution, a strong dynamic market system that can always correct itself is the best solution. So they spent time, energy and resources building, equipping and continuously strengthening systems that will be independent from the 'individual'. That is what is keeping them today.

We do not have that in Nigeria. That is why the CBN is doing what it is currently doing. And it can only do as much as it is limited.

kaboninc:
The West figured that developing a robust institution, a strong dynamic market system that can always correct itself is the best solution. So they spent time, energy and resources building, equipping and continuously strengthening systems that will be independent from the 'individual'. That is what is keeping them today.

We do not have that in Nigeria. That is why the CBN is doing what it is currently doing. And it can only do as much as it is limited.

Isn't it the case that the the government's highly illogical interventions are responsible for the lack of a strong and robust market system? The government is like a parent who won't let his/her child play with other kids because he is wimpy. Clearly, such a child will never grow strong.

Seun:

Isn't it the case that the the government's highly illogical interventions are responsible for the lack of a strong and robust market system? The government is like a parent who won't let his/her child play with other kids because he is wimpy. Clearly, such a child will never grow strong.

That is very true and I strongly align with you.

However, it takes a whole lot of effort and time (decades) to build a strong virile system but most importantly, from a determined and passionate perspective. More so, most of these decisions (decisions that should help to build a strong and robust system) are politically influenced especially the decisions relating to fiscal policies. So today, the CBN is just trying its best to save the country. That is just the truth!

But be that as it may, I do not think there is any truth in this news story.

Banks cannot buy FX, in fact they dare not. Only the officers of the bank (acting without the authority or consent of the bank) could procure FX only on behalf of their customers. Should they require FX, they must go through the official channel, most especially seeking approval from the CBN.