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New CBN forex policy spurring naira to recovery as access in banks stabilize

Few days after the National Economic Council (NEC) chaired by Acting President, Prof Yemi Osinbajo mandated the Central Bank of Nigeria (CBN) to review its monetary policy, swift actions of the agency seemed to have not only halted value loss but prompted speedy appreciation of naira against the dollar.

Nigeria is highly dependent on imports and Nigerian banks have long provided trade finance facilities to importers. Currency scarcity and exchange rate weakness have made it harder for importers reliant on naira-denominated cash flows to service US dollar-denominated trade finance lines, forcing some banks to restructure their obligations with international correspondent banks last year.

Before the mandate, naira depreciated to all time low of N529 weekend and started value addition from this week, capping at N501 Thursday.

The emerging confidence renewal according to financial analysts will deepen business revival trend after months of shocks and further ease access to forex as commercial banks now have CBN’s confidence to manage the system.

However, there are fears in some quarters that some fraud-minded banks may abuse the new policy directive by way of perpetuating currency round tripping. But observers are upbeat that the apex bank had put in place, measures capable of discouraging such act.

The naira which sold at an all time high of N529 to the dollar on Monday this week firmed by 3.3 per cent at the parallel market after the CBN sold $370.9 million at the interbank market for retail use. The naira yesterday sold at N505 to the dollar firmer than N519 which it sold on Tuesday.

Analysts at Fitch and Cowry Assets Management Limited say the new policy which ensures the provision of forex for payment of school fees, travel and medical expenses would ease the foreign currency liquidity pressure faced by banks in the country.

Besides, the pressure on the naira is also being reduced as those who would have sourced dollars from the parallel market are now being accommodated at the official end of the market. The CBN had on Tuesday offered $500 million for sale but had sold $370 million as banks ran out of naira to buy up the dollar sales.

Thursday, market pundits anticipated that the new measures could pave the way for a gradual return of confidence in the foreign exchange market. We also expect the monetary authority to do more to harmonise the exchange rates and thereby discourage arbitraging.”

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, said, “The CBN’s new forex action is not a new policy per se; it is an extension of the existing policy. The CBN is trying to improve forex supply in the official market to end-users in order to reduce pressure at the parallel market.

“This will in turn narrow the gap between the official and parallel market rates. It is good but I doubt if they can sustain it. We are not also sure if this will address the underlying challenges.”

Already, leading assessment agency, Fitch Ratings has maintained that the most important aspect of the CBN’s announcement was a plan to normalise the forex interbank market.

It said “The intention is to clear the backlog of overdue foreign currency obligations owed by banks to international creditors. These are primarily trade finance obligations owed to correspondent banks.

“In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy. The CBN said that providing foreign currency to the manufacturing sector is still a priority, but with restrictions eased, larger banks with greater access to foreign currency will be free to lend to the smaller banks whose access to international funding is restricted.

Another good policy line of action hailed by Fitch is the reduction in the length of days of forward contracts from 180 days to 60 days would reduce waiting period for banks and should help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy.

In a statement to welcome CBN’s new deal with banks on forex by Fitch, it said “The CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations”.

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