Wednesday June 15, 2016 5:23 pm / Godwin Emefiele
Speech by Godwin I. Emefiele (CON), Governor of the Central Bank of Nigeria at the Unveiling of the Framework for the Reintroduction of the Managed Floating Exchange Rate System 15e june 2016
Good morning ladies and gentlemen and welcome to the Central Bank of Nigeria (CBN). The Bank’s Management convened this Press Conference in response to one of the commitments contained in the Communiqué of the Monetary Policy Committee (MPC) of 24e May 2016. After extensive consultations and careful preparation, the Board of Governors of the CBN is delighted to unveil to relevant stakeholders and the general public the general framework and directions of the flexible exchange rate interbank market, to which we have alluded to at the end of this meeting of the MPC. Before going into the details of this new policy, allow me to provide you with a brief background.
We all now know that Nigeria has faced the effects of three large and simultaneous global shocks, which began around the third quarter of 2014. These include:
- The drop of more than 70% in the price of crude oil, which represents the largest part of our foreign exchange reserves;
- Slowing global growth and geopolitical tensions along critical trade routes around the world; and
- Normalization of monetary policy by the Federal Reserve of the United States.
Given these headwinds, the CBN experienced a significant decline in our foreign exchange reserves from around US $ 42.8 billion in January 2014 to around US $ 26.7 billion in 10e June 2016. In terms of inflows, the Bank’s foreign exchange earnings have grown from around US $ 3.2 billion per month to current levels of less than US $ 1 billion per month.
Despite these results, the demand for foreign currency has increased considerably. For example, in 2005, when oil prices were around US $ 50 per barrel for an extended period, our average import bill was
NOT148.3 billion per month. In contrast, our average import bill for 2015 was around NOT917.6 billion per month. Unfortunately, the interplay between the reduced supply of foreign currency and the increased demand for foreign currency has resulted in a substantial reduction in our foreign exchange reserves.
In order to avoid further depletion of reserves, the CBN has taken a number of compensatory policy measures, anchored on prioritizing the most critical foreign exchange needs as well as maintaining exchange rate stability. After allowing two adjustments from August 2014 to February 2015, we decided to manage the Naira-Dollar exchange rate at around
NOT197/1 USD in the last 16 months, then provide the available but very limited currencies to meet the following needs:
· Commercial bank letters of credit
· Import of raw materials, factories and equipment,
· Importation of petroleum products, and
· Payment of tuition, BTA, PTA and related expenses
During the intervening period, we are pleased to note that these policies have given rise to positive developments. In particular, we have succeeded in stabilizing the exchange rate since February 2015, thus creating certainty for household and business decisions, and also supporting the economic growth we recorded in 2015. We have largely eliminated speculators and traders. rent seekers from the foreign exchange market. . Our reserves, although they have declined, are still strong and are able to cover about 5 months of Nigeria’s imports against the international benchmark of 3 months. In addition, the domestic production of prohibited items in the foreign exchange market is increasing nationwide, creating more jobs for many more Nigerians.
Despite these positive results, the Central Bank of Nigeria has always maintained that it will continue to monitor the situations on the ground and ensure that the Bank’s policies reflect these facts and developments rather than the sentiments of any group or sector. It is in the light of this principle that we now believe that the time has come to re-establish the automatic exchange rate adjustment mechanism with the reintroduction of a flexible interbank exchange market. The functioning of this market will be in line with the Bank’s objectives of improving efficiency and facilitating a liquid and transparent foreign exchange market.
Although the detailed framework and operational guidelines for the market will be made public immediately after this press briefing, allow me to highlight the key aspects:
a. The market will function as a single market structure through the interbank / autonomous window;
b. The exchange rate would be purely market determined using the Thomson-Reuters order matching system as well as the conversational trading book;
vs. The CBN would participate in the market through periodic interventions to buy or sell currencies as needed;
D. To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) which would be registered by the CBN to deal directly with the Bank for large transactions on the basis of two-way quotes;
e. These Primary Dealers must operate with other dealers in the interbank market, among other obligations which will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines, which will also be published immediately after this Press Briefing;
F. There will be no predetermined spread on foreign exchange spot transactions executed through CBN intervention with primary traders, while all spot foreign exchange markets purchased by authorized brokers are transferable to the foreign exchange market. interbank exchange;
g. The forty-one (41) items classified as “not valid for foreign exchange” as detailed in a previous CBN circular will remain inadmissible on the Nigerian foreign exchange market;
h. To improve market liquidity, the CBN may also offer long-term foreign exchange contracts of 6 to 12 months or any other duration to authorized brokers;
I. The sale of forward currency contracts by authorized resellers to end users must be transaction-backed, with no predetermined spreads;
j. The CBN will introduce non-deliverable over-the-counter (OTC) futures contracts settled in Naira, 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 exchange rate volatility by shifting the demand for non-urgent foreign exchange from the spot market to the futures market;
k. OTC FX futures contracts will be non-standard amounts and different fixed durations, which can be sold on any date, thus ensuring tailor-made maturity dates;
the. Proceeds from foreign investment inflows and international money transfers will be purchased by licensed brokers at the daily interbank rate; and
mr. Non-oil exporters are now allowed unrestricted access to their foreign exchange products, which will be sold on the interbank market.
In terms of timelines, the Central Bank Management agreed as follows:
a. The detailed operational guidelines for the flexible foreign exchange market will be issued immediately following this press conference;
b. The guidelines for the selection and operations of FX Primary Dealers would also be published immediately following this press conference;
vs. The selected SVTs will be informed by Friday 17the June 2016. All other non-primary resellers would remain valid and eligible to participate in the market;
D. Interbank exchanges according to the new directives will start on Monday 20e June 2016; and
e. The contents and rates of OTC currency futures contracts settled in Naira will be announced on Monday 27e June 2016.
In conclusion, let me note that the Central Bank is firmly committed to making this market as transparent, liquid and efficient as possible. Therefore, we will neither tolerate unscrupulous behavior nor hesitate to impose severe penalties on violators. In particular, CBN expects all Authorized Resellers to demonstrate the highest level of professionalism. We expect them to understand the spirit and the letter of this transition to a market-based system. The CBN will not allow the system to be undermined by speculators and rent seekers. Let me stress that any attempt to violate any aspect of this new framework will be heavily penalized by the CBN and this may indeed result in the suspension or withdrawal of the FX trading license of a violating authorized dealer.
I therefore urge market players to help us ensure that this new system enables the CBN to carry out its mandate more effectively and efficiently, thereby ensuring the preservation of our rare common wealth, stability. of our financial system and the growth of our economy for the benefit of all Nigerians.
Thank you all for listening.
1. Revised Guidelines for the Operation of the Nigerian Interbank Foreign Exchange Market
2. How CBN Naira Settled OTC FX Futures Market Will Work
3. Guidelines for Primary FX Traders
4. Exchange rate flexibility beyond expectations
5. The New Fully Floating Foreign Exchange Market – At a Glance
6. Implications for Markets as CBN Finally Floats the Naira