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A Fall Back to the Old Order

By Lucky Fiakpa
Lucky Fiakpa writes that with barely two months in office of the new Central Bank of Nigeria governor, the apex bank is reversing most of its policies and this could engender loss of confidence in the market if this is done frequently and within short intervals as has been the case

Sanusi, CBN boss
Sanusi, CBN boss

This is contrary to the apex bank governor’s earlier position about the market. Barely a month in office as CBN governor, on July 7 to be precise, Sanusi unveiled a series of policy measures aimed at liberalising the foreign exchange market and a market determined exchange rate.

Liberalisation Policy
The CBN, which instituted tight monetary and foreign exchange management from last November after it officially depreciated the local currency the naira, commenced a process of return to the liberal foreign exchange market towards the end of former CBN governor, Professor Chukwuma Soludo’s tenure.

Sanusi, on the assumption of duty, however, fast tracked the market liberalisation policy processes. The apex bank offered guarantee for inter-bank placements and placement of Pension Fund Administrators. It also reintroduced the Wholesale Dutch Auction System (WDAS) and restored inter-bank trading of foreign exchange irrespective of source. The apex bank also indicated its readiness to meet foreign exchange demand by increasing the amount of foreign exchanged per auction session from $150 million to $200 million.

The next step was the readmission of both classes ‘A’ and ‘B’ BDCs into the cash sale of dollars scheme as well as an increase in the net open position limit of banks to five per cent of their shareholders fund from 2.5 per cent.

Though initially ineffective due to interest conditionalities attached, which was later removed, the guarantee for inter-bank lending significantly addressed the liquidity crisis occasioning sharp decline in inter-bank interest rate by about 50 per cent. From more than 20 per cent before the guarantee, inter-bank interest rate fell to 10 per cent within one week.

Policy Reversal
The WDAS was introduced on July 13 and the CBN indicated its readiness to meet foreign exchange demand by increasing the amount of foreign exchanged per auction session to $200 million from $150 million. However, rather than lead to strengthening of the naira, the measures tended to weaken the local currency, especially at the Wholesale Dutch Auction System where naira has declined steadily from N146.10/$1 on July 13 to N150.31/$1 a fortnight ago, representing a loss of N4.21 to the dollar.

Consequently, the CBN a fortnight ago, issued circular barring banks from trading among themselves foreign exchange, sourced from the official market. The circular with reference TED/FEN/FPC/GEN/01125, and titled:

“Non Transferability of Funds from Wholesale Dutch Auction System (WDAS) Among Authorised Dealers”, directed that banks can no longer use foreign exchange sourced from the official market for inter-bank trading. Such funds, it said should only be used to meet customers demand for foreign exchange. It also directed that banks should keep separate books for their inter-bank foreign exchange transactions and WDAS foreign exchange transactions, and make the books available to it examiners.

The Central Bank of Nigeria adjustment of its rules regarding the Wholesale Dutch Auction System is aimed at preventing what has become known locally as “round tripping.” Through this mechanism, banks effectively buy dollars from the central bank and sell same in the inter-bank market at more advantageous rates. The directive, it is gathered will help discourage excess bidding and check demand for forex, which has soared with the re-introduction of WDAS.

The CBN had in its first auction at the bi-weekly trading a fortnight ago offered $600 million, which more than doubled the past daily sales, in a bid to meet demand.

Besides halting speculation, it is also believed that the measures could encourage banks to seek autonomous sources of forex for their inter-bank transactions instead of solely relying on CBN as the main supplier.

Earlier on July 29, the apex bank had imposed restriction on the foreign exchange demand at the Wholesale Dutch Auction System auctions by limiting foreign exchange bids submitted by banks.

In a circular to all authorised dealers signed by director Trade and Exchange Department, Alhaji Batari Musa, and titled “Re: Revised Guidelines for the Operation of the Foreign Exchange Market: Wholesale Dutch Auction System”, the CBN stated, “This is to inform all authorised dealers that paragraph 3 (b) of the circular Ref:  TED/FEM/FPC/GEN/01/110 of July 8, 2009 on the above subject has been amended as follows: “Authorised Dealers shall submit bids for only one (1) tranche per auction, while the Central Bank of Nigeria reserves the right to reject any bid that is deemed to be unrealistic. This amendment takes immediate effect”.

Previously, banks can submit three tranches of bids per day. By this circular, CBN may be applying a subtle measure to control daily foreign exchange demand by banks. Previously banks can receive foreign exchange bids from customers and submit them in three tranches before the close of bidding on each foreign exchange auction day. Banks can collate foreign exchange bids every two or three hours and submit to the CBN.

But with the new measure it means that banks can only submit one tranche of bids and can no longer wait to receive bids every two or three hours from customers. The implication is that customers whose bids could not make that one tranche would have to wait till the following day to have their bids resubmitted by their banks. With this measure, foreign exchange end users would not be able to use the exchange rate of the day to determine their bid rate and hence tamper with the upward pressure on the naira exchange rate.

This policy came almost simultaneously with yet another which requested banks to make returns on foreign exchange sales to importers of petroleum products (PMS only), on a monthly basis. In what looks like a fresh monitoring regime for banks’ foreign exchange sales to importers of petroleum products, the CBN in a circular posted on its website and signed by its Acting Director, Trade and Exchange Department, Batari Musa, requested that, “all authorised dealers to render returns on forex sales to importers of petroleum products (PMS only) for the period of August 2008 to July 31, 2009.”

It further stipulated that the returns should be on monthly basis, using a format that includes serial number, name of bank, name of customer, form ‘M’ mode of payment, amount and exchange rate used for the transaction. The CBN also directed that the returns should reach the Director, Trade, and Exchange Department on or before August 10, 2009 via an email address. “Subsequently, such returns should be rendered on a monthly basis on or before the 5th of the following month, failing which the appropriate sanctions shall be imposed,” the statement said.

Most observers see this policy as commencement of CBN’s probe of banks’ transactions in the energy sector while the second leg is that banks that engaged in round tripping of forex in the course of doing business with importers of petroleum products will be exposed.

Some banks are not only exposed to margin loans, they are also exposed to failed loans granted to importers of petroleum products. Due to the fall in oil prices, most of these importers could not pay their debts, a situation made worse by the exchange rate of the naira vis-à-vis other currencies that has not been stable.

Apart from that, some banks had sourced forex at the official rate and sold same to these importers at the parallel market rate, which is always higher, thereby pocketing the margin. The CBN has always frowned at this practice and it now seems ready to deal with.

The apex bank’s quest to unravel bank’s exposure to the energy sector of the economy commenced in June this year, when it issued a circular to all banks to that effect. The said circular was signed by the CBN’s Acing Director of Banking Supervision, D.A.N. Ekeh and titled, “RE: Submission on details of total exposures to companies in the energy sector”.

In the circular, the apex bank had requested all banks to submit to the Acting Director of Banking Supervision details of their total exposures to companies in the energy sector, namely Up-stream, Down-stream and oil service companies as at May 31, 2009. According to the circular, the information should include details on the borrower, the outstanding balance, the performance status – performing, non-performing and restructured – as well as collaterals given and their current market value.

Naira Appreciation
It is not certain if the recent policy reversals were responsible for the last week appreciation of the naira in the market but the currency for the first time since the re-introduction of WDAS appreciated against the dollar exchanging N150.01 for one dollar against previous rate of N150.31 to the dollar, representing 30 kobo gain for the local currency.

However, a CBN source says demand for forex dropped as a result of some recent policy measures of the apex bank such as the one that barred dealers from trading forex bought at the CBN window at the inter-bank. With the tightening of the noose against speculation, demand is said to have moderated.

The naira gain was also noticed at the inter-bank market where one dollar exchanged for N153.90 as against 154.60 it previously traded. The appreciation at the inter-bank may also have been as a result of the inflow of about $60 million from the oil majors.

Depreciation of the Naira
The initial depreciation of the naira following the re-introduction of WDAS was said to have been caused by speculative demand for forex, especially by banks. Most foreign exchange dealers had thought that owing to the dwindling external reserves position which fell from a peak of $63 billion last year to the current level of less than $43 billion, the apex bank would not be in a position to adequately meet foreign exchange demand of customers. Should this be the case, it was expected that the naira would continue to depreciate.

In order to take advantage of the expected depreciation of the naira, some banks started making excess foreign exchange demand from the CBN to warehouse against the future. In addition, foreign exchange users especially corporate organisations also decided to buy foreign exchange for warehousing as well.

This therefore resulted in sharp rise in the level of demand. From $72 million per session at the start of WDAS foreign exchange, demand per session rose to $604 million two weeks ago. Further analysis of the foreign exchange demand and sales in the six auctions conducted by the CBN before and after the introduction of WDAS shows demand for foreign exchange shot up by 351 per cent to $3.16 billion from $861.8 million. Total amount sold also rose by 56 per cent to $1.19 billion from $$764. Average demand per auction session went up by 313 per cent to $526.7 million from $127.4 million, while average sales rose by 38 per cent to $198.4million from $143.6 million.

As a result, the official exchange rate rose from N146 prior to WDAS to N150.25 per dollar, indicating 425 kobo depreciation of the naira. Also at the inter-bank foreign exchange rate rose from N148.17 to N156.84 per dollar, while at the parallel market the exchange rate fell to N158 per dollar from N153.

Market Liquidity
As at last week, the total amount sold per session rose to an average of $437.5 million while the official exchange rate rose again to N150.31 per dollar, indicating depreciation by six kobo. In fact, it was reliably gathered that some banks were demanding as high as $200 million per session. The huge volume of foreign exchange demand translated into regular outflow of funds from the inter-bank money market and as a result reverses the improved liquidity situation in the market.

A fortnight ago, cost of funds started moving upward indicating scarcity of funds has re-emerged in the inter-bank money market. This is indicative of the fact that well over 85 per cent of inter-bank foreign exchange transaction is driven by foreign exchange from the official market. As at Wednesday, interest rate on call lending which was stable at 10 per cent last week had risen to 11 per cent, while interest rate on collateralised lending or open buy back (OBB) rose to 7.8 per cent from 7.3 per cent. Interest rate on seven-day lending also rose to 12.63 from 12.2 per cent while 30-day lending increased from 14.2 to 14.7 per cent.

While it is good for the CBN to review its policies from time to time in order to achieve the best for the country, it could also engender loss of confidence in the market among investors if this is done frequently and within short intervals as has been the case that within two months in office, the apex bank is reversing most of its policies.

Quote
1.    The CBN, which instituted tight monetary and foreign exchange management from last November after it officially depreciated the local currency the naira, commenced a process of return to the liberal foreign exchange market towards the end of former CBN governor, Professor Chukwuma Soludo’s tenure.

2.    The WDAS was introduced on July 13 and the CBN indicated its readiness to meet foreign exchange demand by increasing the amount of foreign exchanged per auction session to $200 million from $150 million. However, rather than lead to strengthening of the naira, the measures tended to weaken the local currency, especially at the Wholesale Dutch Auction System where naira has declined steadily from N146.10/$1 on July 13 to N150.31/$1


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