Optimism trails CBN’s new monetary policy

THE new monetary policy regime of the Central Bank of Nigeria (CBN) may have been greeted with optimism as experts raised hopes that the measure would help to turn the tide in favour of the country’s currency.

  The latest technical devaluation tool was opted for as a last resort on the back of assessed ineffective application of moral suasion, policy rate adjustment and currency devaluation over a period of time.

  Specifically, CBN had last week, closed the Retail Dutch Auction System/Wholesale Dutch Auction System (rDAS/wDAS) segment of the foreign exchange market and quoted an exchange rate of N198/$ as the official selling rate, which by implication, was a further devaluation of the naira.

  But Afrinvest Securities Limited, an investment banking firm, said the development was in the right direction as it would moderate uncertainty and fears in the foreign exchange and capital markets over the actual direction of the regulatory authorities.

  “The development was against the backdrop of the pressure on the naira at the interbank market, which widened the spread between the official and interbank rates to over N38 and fuelled speculative plays for arbitrage. 

  “We view the closure of the rDAS window as a positive development, which has moderated the level of uncertainty and apprehensiveness in the foreign exchange and capital markets, regarding possible direction of CBN on exchange rate management. 

  “The recent stability in Brent Crude price around $60 per barrel over the past six days is also a positive for the economy, though we expect the uncertain political terrain and fiscal imbalances to continue to constitute a drag on economic activity and market performance in the first half of 2015.

  “The policy will potentially reduce speculative activities, while CBN ad-hoc interventions will keep naira volatility in check. We expect the currency to continue to trade within the range of N195 to N200/$ at the interbank market,” analysts at the securities company said.
 

  Earlier, the Managing Director of Financial Derivatives Limited, Bismarck Rewane, had commended the policy, saying that overpricing the currency or depleting reserves to defend it would not solve the problems, but rather predispose the economy to worse case scenarios.

  According to him, the measure would now make naira to be convertible and acceptable across the borders of the country, adding that there will be more naira available for governments at various levels, as well as the availability of the dollar, which will allow the naira to compete favourable and consequently, find its appropriate value.

  “This is all about currency adjustment and obtainable in every economy. We are moving away from control, auction and now tending towards convertibility. Our currency is now tradable and whatever the naira is priced now is its real value. I am optimistic that the speculations will be over now,” he said.

 The President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, was also optimistic that the decision to close the exchange windows would help stabilize the rate in the market, adding that the success would depend on the extent CBN would consolidate on its policy achievements.

  He pointed out that the immediate implementation of the policy would restore fiscal discipline and disabuse banks from the sharp practices of speculating and round-tripping, because they are the major players in the foreign exchange market.

  However, ahead of the closure notice, CBN had sold $390.01 million of the $400 million offered at the bi-weekly rDAS session held on Monday and Wednesday at the marginal rates of N168/$. 

  The bank’s direct interventions in the Interbank market and concurrent ban placed on trading of intervention fund with other banks aimed at curbing speculation led naira to record some gains at the beginning of the week. 

  The exchange rate moderated to close at N198.05/$ by mid-week at the Interbank market, a N3.38 appreciation relative to last Friday’s close of N202. 

  Although Interbank foreign exchange market’s liquidity remained low relative to demand at the time of the policy annoucement, naira volatility in the trading session was moderated as the CBN intervened in the interbank market with dollar auctions.