By Emeka Anaeto, Economy Editor

LAGOS — Another major shift in foreign exchange market policy may be underway after some months of controlled market as authorized dealers begin moves to redress a perceived imperfection in the current market structure and rules. Banks through Financial Markets Dealers Association are meeting with the Central Bank of Nigeria (CBN) to fine-tune the policy and make it more liberal while fashioning ways of managing frivolous demands.

CBN Governor, Mr Godwin Emefiele

A proposal to this effected has already been made to CBN while the apex bank may be holding talks with the dealers this week. Some observers believed that the push for a change was necessary at this point to secure acceptable policy environment before the in-coming administration reigns in political considerations which may be anti-market.

Banks have quietly bemoaned some measures introduced by the CBN towards end of last year which was aimed at curbing demands considered frivolous by the apex bank but the policy ended up creating further distortions mainly in the interbank/black market interface as well as in the acceptance of the overall currency market architecture involving foreign investors.

Consequently, the parallel market margin had grown to over 10 per cent while arbitrage has heightened. In the run-up to the current policy, the concern of the apex bank was that speculative demands had put pressure on the stability of both the exchange rate and the foreign reserves, apparently a situation which had forced the two into negative trend in the past six months.

Order-based system

In addition to narrowing the trading window in December 2014, CBN had in February this year further restricted the market by introducing the order-based system in which banks can only buy foreign currency when they have matching orders from clients that need to import goods.

But many industry observers were sceptical that the policies, obviously aimed at stemming the depreciation of Naira amidst other fiscal challenges of the Federal Government, were also designed to prevent further erosion of the political capital of the incumbent president facing stiff electoral challenge.

Now the election is lost and won, the market dealers are equally worried that the pronouncements of the winner, Muhammadu Buhari, regarding exchange rate may point to a further control policies that would worsen the market environment. Hence, they would rather want CBN to demonstrate its independence by rolling out market policies independent of political considerations or whatever the in-coming government perceives as what the exchange rate should be.

In the wake of an accusation of political influence in the roll out of the current foreign exchange policy, CBN Governor, Godwin Emefiele said: “The Central Bank remains a very independent institution, just like it was under my predecessor. We have never been influenced by any political consideration. No politician talks to us to try and influence us.”

$5bn defending exchange rate

CBN spent USD5 billion defending the exchange rate in the last three months of 2014, reducing reserves to a three-year low of USD34 billion, while devaluing the midpoint of the official exchange rate to 168 per dollar from 155 and raising the benchmark borrowing cost to a record 13 percent.

It was at this point that the current foreign exchange policy measures were introduced. But conditions of these components of the forex market have worsened leading to significant decline in foreign reserves to a 10-year low last month. Trading restrictions introduced in December last year were needed to cut “spurious or speculative demand” for dollars, Emefiele said. “Any investor that wants to go out is able to do so freely, without any hindrance.”

The local currency held steady against the green back last week, hence the Naira closed flat at N199.10/USD1.00 at the interbank market as the local currency traded within a tight range throughout the week. Similarly, the CBN’s clearing rate steadied at N197.00/USD1.00 for the week. However, the parallel market margin remains high and there was significant instability. In the BDC segment of the forex market last Monday, the value of the naira appreciated by 2.4 per cent to N217.56/USD1.00 from the previous week’s close of N223.10/USD1.00.