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A Step to the Past

By Babajide Komolafe

…As Sanusi reverses forex liberalisation measures

Efforts of the Central Bank of Nigeria to check the liquidity crisis in the banking system and return to a liberal foreign exchange market, with market determined exchange rate is been threatened by speculation in the foreign exchange market forcing the authorities to embark on measures tantamount to policy somersaults, Babajide Komolafe writes.


On July 7, Mallam Sanusi Lamido Sanusi, then barely a month in office as the Central Bank of Nigeria (CBN) governor, unveiled a series of policy measures aimed at tackling the lingering liquidity crisis in the interbank market, and return to a liberalised foreign exchange market and a market determined exchange rate.
To address the liquidity crisis the apex bank offered guarantee for interbank placements and placement of Pension Fund Administrators.

On the other hand it reintroduced the Wholesale Dutch Auction System (WDAS) and restored interbank trading of foreign exchange irrespective of source. It also readmitted Class B bureaux de change into the Cash Sale of Dollars scheme.

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

The WDAS was introduced on July 13 accordingly while 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, foreign exchange demand at the auction session begins to rise gradually and steadily and consequently exchange rate which had remained stable also started to fall.

This development was however attributed to speculation, especially by banks. It was gathered that foreign dealers believe that owing to the dwindling external reserves which fell to $43 billion from $63 billion in the last one year, the apex bank would not be able to meet foreign exchange demand and hence the naira would continue to depreciate.

Consequently, and in order to take advantage of the expected depreciation of the naira, some banks bought foreign exchange rate from the CBN to warehouse against the future. In addition, foreign exchange users especially corporate organisations also decided to buy foreign exchange in advance.

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 interbank 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.

In fact, 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.
The huge volume of foreign exchange demand translated into regular outflow of funds from the interbank money market and as a result reverses the improved liquidity situation in the market.
Last week cost of funds started moving upward indicating scarcity of funds has re-emerged in the interbank money market.

By 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.

A bank senior bank treasurer attributed the re-emergence of scarcity of funds to outflows of foreign exchange purchases. The increasing volume of foreign exchange sales at the Wholesale Dutch Auction in recent times is impacting on market liquidity hence the upward movement of interest rate, he said.
Financial Vanguard investigation revealed that total outflow per week through foreign exchange from the market rose steadily from N22.2 billion in the first week of August to N60.5 billion in the third week before dropping to N57 billion last week. Total outflow through foreign exchange in July was N172 billion.
Realising the linkage between the activities of foreign exchange speculators and its effort to address liquidity crisis in the interbank money market, the CBN began to gradually reverse some of foreign exchange liberalisation measures.

First, on July 29th, it imposed restriction on the foreign exchange demand at the Wholesale Dutch Auction System (WDAS) 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.

The circular a senior bank treasurer who spoke on condition of anonymity told Vanguard that the circular is a subtle measure by the apex bank to control daily foreign exchange demand by banks. He said that 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. Consequently 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 hence they cannot 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 wait till the following day to have their bids submitted by their banks.

He further explained that with the measure foreign exchange end users would not be able to use the exchange rate of the day to determine their bid rate and hence temper the upward pressure on the naira exchange rate.
Second, last week, the CBN yesterday barred banks from trading among themselves foreign exchange sourced from the official market.

In a circular to banks titled, “Non Transferability of Funds from Wholesale Dutch Auction System (WDAS) Among Authorised Dealers”, with reference TED/FEN/FPC/GEN/01125, the apex bank said that banks can no longer use foreign exchange sourced from the official market for interbank 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 interbank foreign exchange transactions and WDAS foreign exchange transactions, and make the books available to it examiners.
A CBN source told Vanguard that the ban was occasioned by the failure of banks to disclose their interbank transactions. The banks are supposed to disclose interbank transactions especially those involved with foreign exchange sourced from WDAS but they were not doing this, the sourced said.

Money market operators however said that the apex bank by this measure has technically suspended the interbank foreign exchange market, as 85 per cent of interbank foreign exchange transaction is driven by foreign exchange from the official market. They also said that since banks can now only buy for customers, the apex bank has also technically reverted to Retail Dutch Auction System (RDAS).

Financial Vanguard investigation however revealed that the policy reversal of the apex bank followed an investigation of foreign exchange demand at WDAS, which show that most of the demand was driven by speculation. In fact, it was reliably gathered that some banks were demanding as high as $200 million per session, and the report of the investigation indicted at least three banks and recommended the suspension of the authorised dealership for three months.

It is however believed that the apex bank decided to forestall further speculation by reversing itself on interbank trading of official foreign exchange, to ensure the effectiveness of its other objectives vis-a-vis the liquidity of the interbank money market.
Market operators however insist that it is not good for the credibility of the CBN governor to be reversing himself on policy issues within just two months in office. They believe that this might occasion lose of confidence in the market and among investors.


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