Ahead of the take off of the new foreign exchange market regime tomorrow, the banking industry has entered a battle of wits and strategy, with some banks amassing cash for foreign exchange bids , while the Central Bank of Nigeria, CBN, has stepped-in to forestall the impact of such move on the exchange rate. CBN had announced a flexible and market driven exchange system last Wednesday, indicating that dealers and buyers of foreign exchange can now access as much forex resources as they can afford but at whatever price is determined by the market forces.

To cover their positions and meet their customers’ forex requirements, banks needed a lot more of Naira back-up as the exchange rate is expected to rise significantly. Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele Consequently, banking industry liquidity surged to about N1.06 trillion – over 382.5 per cent higher than the week’s opening figure of N219.7 billion – indicating that N840.3 billion excess cash has been added to the outstanding liquidity in the system. Out of this N840.3 billion, only the N152 billion maturing treasury bills fund credited the banks by CBN on Wednesday could easily be connected to funds for other services.

Money market dealers told Sunday Vanguard that the bulk of the balance of N688.3 billion were made up of new funds raised for the new forex regime as well as the excess forex bid lodged with CBN the previous week, under the now phased-out weekly forex intervention. The apex bank refunded the excess last week which has now been lined up for the forex bid in the new regime tomorrow. Also, the dealers said there was significant rise in banks’ borrowings from the CBN Standing Lending Facility, apparently to shore-up their Naira back-up for forex requirements.

With the huge amount as at Friday morning, the CBN, Sunday Vanguard learnt, was uncomfortable with the likely impact on the exchange rate, when too much money would be chasing the limited foreign exchange resources in a new regime of full, free market forces. Consequently, the apex bank mopped up about N205.9 billion from the system later in the day on Friday, bringing to N434.9 billion the total cash squeezed out from the system, having rolled over N229 billion worth of matured treasury bills the previous day. Money market dealers said the mop ups are expected to have a moderating impact on the exchange rate spike at the opening of the new forex market tomorrow.

CBN had estimated the exchange rate under the new forex market at between N260 – N270/ USD1.00, as against N199 under its controlled regime phased out last weekend. Analysts said though the N270/USD1.00 shows a massive N71 or 35.7 per cent depreciation of the local currency, the apex bank would have it as tolerable limit against a possible spike to N300/USD1.00, about 50 per cent depreciation, due to too much Naira cash chasing the limited foreign currency in a free market.

In fact, some analysts’ opinion monitored since the new forex regime was announced on Tuesday, suggested that the exchange rate could open at any price within N250 and N370 indicative of the type of uncertainty currently existing in the minds of most people, including bankers. Earlier last week, Naira traded as low as N370.00/USD1.00 at the parallel market but appreciated to N355.00/USD1.00 on Friday. Market rate for the local unit is expected to be determined in the week ahead as the new forex policy framework becomes operational on Monday.

According to analysts at Afrinvest West Africa, a Lagos based investment house, “interbank market rate is expected to spike whilst parallel market rate is likely to converge towards the interbank rate on increased supply”. But they also noted the concluding remark of the CBN governor, Mr. Godwin Emefiele, that market participants should “be calm, no need to worry, everything is fine.”

Read more at: http://www.vanguardngr.com/2016/06/banks-amass-n1-1trillion-war-chest-new-forex-bidding/ lalasticlala, dominique, Mynd44

What's the implication?

Chai

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May God save Nigeria from this gambling and propaganda approach to governance.

Likely Effects of the FX markets aaaas from Tommroow

This is good for governors and states. For April, the 3 tiers of government shared a total of N281.5bn. We know that this money was changed from dollars at around N199 so working backwards, this gives us $1.4bn that was available to share (some of the money is VAT which is in naira but let’s keep it simple). States and LGs got N144.2bn of that money or $725m if we work back to dollars. Now we know that the ‘real’ rate was around N350 at the time. But let’s say the interbank market settles at N310 when it opens, this means that the states and LGs would have gotten N225bn instead of N144.2bn they got. This is a big difference given that these states have been running around begging for money.
That said, a lot of these states are owing money in foreign currency for the foreign loans they have taken. To repay those loans, they have been converting their naira at the official N199 rate. Now they will also have to pay the interbank rate of N310 to buy their dollars. A state that has a lot of foreign currency loans will not see much of a difference from the new rate. But if you notice that your governor starts ‘carrying shoulder’ it might mean that your state doesn't have too many foreign loans and is now ‘liquid’ as Nigerians like to say.
Unless you have not been reading this blog closely, you must have noticed that Alhaji Putin is my guy. As I’ve been saying, he has been getting roughly $15m per week at N199 for months now. That party is now over. He too will now be buying at the interbank rate like everyone else and there will no longer be a special rate. Glory be. At the post-MPC press conference where CBN trailed the new ‘flexible’ policy, Godwin Emefiele hinted that there would be a ‘critical’ rate for ‘critical’ people. No mention was made of that today. Thank God.
What of the federal budget? This will help the FG in the way it helps states above. If nothing else, it will be easier for it to pay salaries now and spend money on anything else that does not require imports. Last week, the government announced the Home Grown School Feeding Programme. An initial N93bn has been budgeted for the programme. Given that this is a priority programme for the government and most of the costs are in naira (if not all), there should be more funds available for the government to pursue programmes like these.
Petrol nko? When the N145 price was announced last month, it was said to have been calculated using a rate of N285 to $1. This is Nigeria’s biggest forex expense so it will be sensitive to whatever the exchange rate is. So what if the interbank rate goes above that? It’s an interesting question. But, until foreign investors return from their holding formation outside Nigeria, CBN will still be the biggest source of dollars in the market. I suspect (this is just my guess) that the CBN will keep one eye on the fuel price when selling its dollars to those FXPD creatures. At any rate, a few days ago, the petrol marketers cabal were wailing in the papers that petrol demand has dropped by 40%. There is only so much Nigerians can take so any further price increase will be met by reduced demand by Nigerians. I imagine that everyone is now watching their petrol usage more closely. Very good. The business of smuggling petrol across the border to Cameroun and Benin Republic is also now dead as the dodo bird. As long as the government holds its nerves and minds its business, Nigerians should be able to deal with the marketers themselves.
Quite a number of Nigerian companies (mostly oil and gas) borrowed from Nigerian banks in foreign currency. It is one thing to borrow money when oil is $100/barrel, it is quite another thing to repay that same money when oil is $50/barrel. At the end of 2015, CBN said the total amount of bad loans in the banking system — where the borrower is not making repayments — was N650bn. A few days ago, CBN released updated figures up to the end of April 2016. The bad loans in the system are now a shocking N1.38trn. If CBN is openly confessing to N1.38trn, do you think the actual number is higher or lower? Don't forget that banks have already written off some of these bad loans. First Bank reported an 82% drop in profits for 2015 mainly because it had to put N119bn worth of loans on standby to go bad. It has promised to sack 1,000 workers to balance the books. Some of these bank debtors with foreign currency loans were still managing to get dollars at N199. Now that they will have to pay market rate, the bad loans in the system can only rise. Which means more job losses at banks. You have to feel sorry for people who will lose their jobs. But some of these banks need to learn a hard lesson and there is no other way to do it than this way.
And inflation? Latest numbers from the Nigerian Stats agency shows that inflation is running at 15.6%. If the exchange rate goes up officially, surely this can only mean prices of things will go up further stoking inflation right? Well, it’s not that straightforward. The truth is that hardly anyone was getting dollars at the N199 rate anyway. Most imported goods are already priced at the black market rate. My hunch is that the dollar will settle at a lower rate than it currently is so this new rate might even lead to slightly lower prices. Nigeria is also a poor country so you can’t keep increasing prices and expect people to take it. At some point, people will find alternatives or just eliminate that demand. I will stick my neck out and say inflation will go down from here.
There is a huge backlog of forex demand that remains unmet. This amount has been growing for a while now and some say it is now between $6bn — $9bn. The most ‘popular’ group in this constituency are the foreign airlines who now have around $600m trapped in Nigeria. Once the market opens next week, it will be like opening prison doors for prisoners — these guys will inundate the market and increase pressure on the naira. Unless CBN has some special plan to meet this likely demand head on (sauces tell me they have), the exchange rate may spike before it settles later. Keep calm. Once the mess is cleared, things should settle down.
Even though CBN will be in VIP section selling dollars to the FXPD creatures, from time to time, it will wander out into the main club and sell dollars if it feels the rate is doing wan kain. What is a Nigerian forex policy without a new acronym? We now have something the CBN calls Secondary Market Intervention Sales (SMIS). That is, it will sell dollars directly to the main market where FXPDs and Non-FXPDs trade just to keep things stable.
If you need dollars, just go to your bank. If you want PTA or BTA or whatever you call it, just go there with your ticket and ask for it. If you need to pay school fees, just fill whatever form you need to fill. Those 41 items are still banned so if you want to import them, you will need to buy from the black market. But the days of dollar scarcity where you wanted PTA and couldn’t get it should be over. Whatever the supply of dollars is, the price will now reflect it. You will also see that export proceeds will ‘shoot up’. Those exporters who have been avoiding bringing back their export proceeds will now do so. So those export proceeds that have supposedly been collapsing, according to CBN, will be mysteriously revived now.

Good analysis @Nairaswitch. At least you were kind enough with the disadvantages of the new policy. Remember this country and especially this govt got a way with words. They will tell you how they plan to assuage the astronomical deficit in BOP but turn around to enslave the citizenry and the economy. Are you aware some persons including my humble self transacted at 199/245-$1 ? How do you handle foreign procurement of plants? What do you think will be the impact(cost implications) on infrastructural development and contracts? How does this now translate to the already hyped polity knowing fully well or banks have set aside funds for panic buying? The economy is on a precipice and I think this policy further enslaves growing business.

Those 'Critical customers' are our politicians whom have created a safe haven for themselves under this new regime knowing fully well that just like the cabals in the petroleum sector the average Nigerian will have to cue up in NNPC to get pms at control price for days or even weeks only to have his tank filled halfway. Imagine how it will now be with the forex, you'd have to wait months for a window cuz obviously some of us can thrive our business in this 'floating' regime.

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