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| Godwin Emefiele |
Good afternoon ladies and gentlemen and
welcome to the
Central Bank of Nigeria (CBN).
The Management of the Bank has called this
Press Conference in response to
one of the commitments contained
in the Communiqué of the Monetary Policy
Committee (MPC) of 24th May 2016. Having consulted widely and prepared carefully, the committee of Governors of the CBN is delighted to
unveil to relevant stakeholders and the general
public, the broad framework and guidelines of the
Flexible Exchange Rate Inter-bank Market, which
we alluded to at the end of that MPC Meeting.
Before I proceed into the details of this new
policy, please permit me to
provide you with a brief context.
We all know by now that Nigeria has been
dealing with
the effects of three significant and simultaneous global shocks, which began around the third quarter of 2014. These include:
The over
70 percent drop in the price of crude oil, which contributes the largest share of our
Foreign
Exchange Reserves; Global growth
slowdown and geopolitical tensions
along critical trading routes in the world; and Normalization
of Monetary Policy by the United States’
Federal Reserve.
In view of these headwinds, the CBN
witnessed a significant decline in our Foreign Exchange Reserves
from about US$42.8 billion in January 2014 to about US$26.7 billion as of 10th June 2016.
In terms
of inflows, the Bank’s foreign exchange earnings have fallen from about US$3.2 billion monthly
to current levels of below a billion dollars per month.
Despite
these outcomes, the demand for foreign exchange has risen significantly. For example, in 2005 when we had oil prices at about US$50 per
barrel for an extended period of time, our
average import bill was N148.3
billion per month. In stark contrast,
our average import bill for 2015 was about N917.6 billion per month. Unfortunately, the interplay between reduced FX Supply and rising FX
demand accounted for a substantial reduction in
our foreign exchange reserves.
In order to avoid further depletion of
the reserves, the CBN took a number of countervailing policy
actions, anchored on the prioritization of the
most critical needs for foreign
exchange as well as maintaining
stability in the exchange rate. Having allowed two adjustments from August 2014 to February 2015, we decided to manage the Naira-Dollar
Exchange Rate at about N197/US$1 over the last 16 months, and then provide the available but highly limited foreign exchange to meet the
following needs:
Matured Letters of Credit from Commercial Banks Importation of Raw Materials, Plants, and Equipment,
Importation of Petroleum Products, and
Payments for School Fees, BTA, PTA, and related
expenses. Over the intervening
period, we are happy to note that
these policies have yielded some positive developments. In particular, we have managed to stabilize the exchange rate since February 2015,
thereby creating certainty for both household and business decisions, and also underpinning the
economic growth we recorded in 2015.
We have largely eliminated
speculators and rent-seekers from
the Foreign Exchange Market. Our Reserves, despite having fallen, is still robust and is able to
cover about 5 months of Nigeria’s imports as
against the international benchmark of 3 months.
Furthermore, the domestic production of
items restricted
from the FX market is picking up
nationwide,
thereby creating more jobs for many more
Nigerians.
Despite these positive outcomes, the
Central Bank of Nigeria has always maintained that it would
continue to monitor situations on the ground and
ensure that the Bank’s policies reflect these
facts and developments rather than
the sentiments of any groups or
sectors. It is in light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the
exchange rate with the re-introduction of a
flexible inter-bank exchange rate
market. The workings of this
market will be consistent with the Bank’s objectives of enhancing efficiency and facilitating a liquid and transparent Foreign Exchange Market.
Although the detailed framework and
operational guidelines of the market will be released to the
public immediately after this Press Briefing,
permit me to highlight its key
aspects:
The
market shall operate as a single market structure through the inter-bank/autonomous
window;
The Exchange Rate would be purely market-driven
using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book;
The CBN would participate in the Market
through periodic
interventions to either buy or sell FX as the need arises;
To improve the dynamics of the market,
we will introduce
FX Primary Dealers (FXPD) who would be
registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes
basis;
These Primary Dealers shall operate with other dealers in the Inter-bank
market, amongst other
There shall be no predetermined spread
on FX spot
transactions executed through the CBN
intervention
with Primary Dealers, while all FX Spot purchased by Authorized Dealers are transferable in the inter-bank FX Market;
The Forty-One (41) items classified as
“Not Valid
for Foreign Exchange” as detailed in a
previous
CBN Circular shall remain inadmissible in the Nigerian FX market;
To enhance liquidity in the market, the
CBN may also
offer long-tenored FX Forwards of 6 to 12 months or
any tenor to Authorized Dealers; Sale
of FX Forwards by Authorized Dealers to
The CBN shall introduce non-deliverable
over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved
FMDQ Trading and Reporting System.
This is an entirely new product in
the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate
by moving non-urgent FX demand from the Spot to
the Futures market;
The OTC FX Futures shall be in non-standardized
amounts and different fixed tenors, which may be sold on any dates thereby ensuring
bespoke maturity dates;
Proceeds of Foreign Investment Inflows
and International
Money Transfers shall be purchased
In terms of timelines, the Management of
the Central
Bank has agreed as follows:
The
detailed operational guidelines for the Flexible Foreign Exchange Market will be released immediately
after this Press Briefing;
The guidelines for the selection and
operations of FX Primary Dealers would also be released immediately
after this Press Briefing; Selected FX Primary Dealers would be
notified by Friday 17th June 2016. All other non-Primary Dealers
would remain valid and eligible to participate
in the market; Inter-bank trading
under the new guidelines will begin
on Monday 20th June 2016; and The
tenors and rates for the OTC Naira-settled FX Futures will be announced on Monday 27th June
2016.
In closing, let me note that the Central Bank is strongly determined to
make this market as
transparent,
liquid, and efficient as possible.
Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to
bring serious sanctions on
offenders. The CBN expects all authorized dealers particularly to display the highest level of professionalism. We expect them to understand
the spirit and letter of this transition to a
market based system. The CBN will
not allow the system to be
undermined by speculators and rent-seekers.Permit me to emphasize that any attempt to breach any aspect of this new
framework will be heavily sanctioned
by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing license of an offending Authorized dealer.
I therefore urge market participants to assist us in ensuring that this new
system enables the CBN to pursue
its mandate in a more effective and efficient
manner, which guarantees preservation of our scarce commonwealth, stability of our financial system, and growth of our economy to the benefit
of all Nigerians.
Thank you all for listening.
Godwin Emefiele
Governor,
Central Bank of Nigeria
15th June, 2016
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