Changes in the Forex Market

Since the last days of February 2017, we have seen an increase in the value of the naira on the parallel market. From NGN 570 to USD 1, as at February 16th, the naira has appreciated to NGN 440 to USD 1. The Central Bank of Nigeria’s latest interventions in the foreign exchange market together with other changes in the economic environment are widely responsible for the rise in the value of the naira.

Increased Liquidity – On February 21st, the CBN engaged in a special wholesale intervention where it offered Deposit Money Banks the sum of USD 500 million for a period of 60 days. While adhering to the CBN’s guidelines, the banks are meeting more demand in the retail forex market, whether the end-user is an individual or a business.

Policy Change – The abolishment of the 60% allocation of forex to the manufacturing sector policy has increased the inflow of forex into other areas. Forex for educational and medical needs, as well as, business and personal travel allowance is now available to the public. In addition, using Deposit Money Banks rather than Bureaux de Change (as was previously used) as a vehicle to reach end-users is likely to yield better results since the banks are under the supervision of the CBN.

Stricter Conditions – The CBN’s rules governing access to forex has the potential of reducing round tripping. According to the rules, in order to access forex for medical or educational purposes, the amount needed would be payed directly to the foreign institution’s account. Also, a travellers’ journey time must exceed 5 hours in order to be entitled to basic travel allowance. On the supply side, the Deposit Money Banks are to give a report on the utilization of any forex obtained from the CBN after 24 hours.

Simplified Access – The tax clearance requirement in obtaining forex has been waived by the apex bank. This improves the ease of accessing forex. Also, the CBN has instructed banks to open forex retail outlets at major airports as soon as possible. Although no timeline was given, this signals wider availability of forex from now on.

External Reserve Increment – The CBN revealed that Nigeria’s external reserve increased from $29.65 billion to $29.74 billion as at February 28th, 2017. The $90 million increase may be due to the rise in oil production as a result of the halt in attacks by the Niger Delta Militants. The increase has affected positively the supply of forex.

Although these interventions have contributed to improving the value of the naira, the sustainability of taking out of the foreign reserves to increase the supply of forex is questionable. A more sustainable solution that can meet the long term demand of forex is required.

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