Chizea: Closure of foreign exchange auction window
ON Wednesday February 18, 2015 the announcement finally came to douse the anxiety of keen followers of the developments at the foreign exchange market that the Central Bank has closed the twice weekly Retail/wholesale Auction window for the allocation of foreign exchange to the preferred real sector operators in the economy. The signs were all there that something was about to give when the Central Bank proceeded to intervene at the interbank foreign exchange market on a few occasions at the rate of 198 Naira to the dollar outside the extant range of 160 to 176 Naira at the official auction window effectively signaling a reprising of the rate of exchange. The Bureau De Change operators were also refused access to allocation from the Central Bank for a period of about three weeks prior to the announced closure and were advised to approach the interbank market for funding. It will be recalled that only recently the Central Bank suddenly made a one off enhanced allocation to the BDCs of 30,000 dollars which was a substantial increase from the weekly allocation of 15,000 dollars a week.
There was also some concern raised when the Central Bank commenced looking at the Domiciliary Accounts when the fear was expressed that it would appear that the CBN was trying to attempt capital controls but, not long after, a circular was issued by the Bank announcing the real intention of the exercise which was to plug leakages being perpetrated by agents who were supposed to earn foreign exchange meant to be repatriated into Domiciliary Accounts to augment the balance on the external reserves. Through this circular, oil and non-oil exporters were given respectively 90 and 180 days as deadline for such proceeds to hit respective Domiciliary Accounts with penalty of 10 per cent of Free On Board (FOB) value of such exports as surcharge where an authorized bank aids and abets such non remittance and where individual exporters are delinquent in making the repatriation as stipulated they will be barred from all foreign exchange market windows in the country.
Before the announcement of this closure I recall that I did an article which was captioned: “Consolidate the foreign Exchange Market” in which I looked at the feasibility of having the same rate for foreign exchange in the market in which I had argued that the only way to achieve this objective is if the Central Bank is in a position to meet all demands for foreign exchange made on it including the frivolous ones otherwise there was no way those who meet their demands in alternative windows would realistically expect to buy at the same rate. In this article I will proceed to consider the reasons which informed the closure of the auction window and to interrogate regarding the possibility of achieving such objectives.
The main objective which must have informed the closure of the auction window was to checkmate the massive speculative attack on the Naira which made the Naira almost go into a free fall mode despite unsustainable hemorrhaging of the foreign reserves as the Central Bank attempted to defend the Naira in the process, subjecting the rates to unacceptable volatility. It is no brainer to observe that the reason for this development was the spread that resulted between the official and the interbank rate on the one hand and between the interbank rate and the Bureau De Change and the parallel market rates on the other. While the official rate was at 168, the interbank rate was tending then towards 200 Naira per dollar resulting in an unsustainable arbitrage of over 30 Naira on a dollar. With this level of arbitrage, the temptation to round trip, speculate and perpetrate all manner of malpractice was almost irresistible and therefore the urgent need to bridge the spread. The Central Bank initially thought that this could be achieved by its continuous appeal to the patriotic sentiments of Nigerians and by intervening in the market with the reserves disappearing before our eyes! The balance on the reserve Account on Thursday February 19, 2014 stood at $32.43 billion, having dropped from the level of $34.47 as at December 31, 2014 representing a drop of 6 per cent which was the lowest balance on this Account in a period of over three and half years.
Would the closure of the auction market finally close the spread between the markets and end the speculative attacks? Well for certain, there are now two recognized and tractable markets; the interbank and the BDC. The BDC segment of the market should not really be in competition with the interbank market as it was supposed to be strictly for retail and for meeting the needs of consumers even though its objectives became in due course, perverted, to serve the goal of money laundering. The Central Bank has served notice that it will continue to intervene in the market at the re-priced exchange rate of 198/199 Naira to the dollar for legitimate and authorized order backed demands for foreign exchange. It is realistic to expect that this rate will prevail in the short term in the market until again economic agents want to take advantage of scarcity of foreign exchange as the fact remains that almost 90 per cent of the supply to the market is from the Central Bank to begin to perpetrate rent seeking behaviour. The CBN should be able to checkmate this tendency if it can enforce its requirement that foreign exchange which is bought from it is not resold, for it is in reselling that arbitrage opportunities would arise. Other economic agents that are in possession of foreign exchange should be allowed to sell at the rate the market can bear but since supply from this source is not significant, it should not have the capacity to dictate the ruling rate in the market.
The depletion of the reserves should be moderated under the emergent scenario as the Central Bank will no longer be obligated to supply dollars to the market at a more or less predictable amount and at the twice weekly frequency. The Central Bank would now enjoy greater degree of freedom with regard to when to intervene and with what amount. It should be expected that under the new dispensation, the Central Bank should, at most, allocate about the same amount as it did under the auction arrangement as it has been estimated that only about 20 per cent of the needs of the market were previously satisfied by the auction market. This observation becomes even more pertinent when we factor in the fact that the latest arrangement should reduce if not completely eliminate speculative demands.
But is it possible to harmonize the rates in the various segments of the market? It should be obvious that this is a tall order. It is obvious that the rates at both the BDC and parallel market segments will be different and higher. It is now not possible to speak categorically regarding the future of the BDCs until the scenario unfolds further but the rates at that segment should be higher than the interbank rate. But this market should be lacking in depth and therefore the rates at this market cannot become the ruling market rate. I have listened to analysts claim that what is important is stability in rate. Yes stability is important as it enables economic agents to take decisions. But let’s not kid ourselves, the prevalent rate of exchange is important as it has inflationary impact and could result to less than the level of predicted growth of the national economy. Once we get through with the time it takes for the reprised value of Naira to begin to take effect, its full impact will become manifest. It has already been reported that there is a drop of 63 per cent on the number of ships that berth at our shores as a result of recent developments in the economy.
We look forward to peaceful conclusion of the general elections to remove the risk occasioned by the fear of its likely outcome and add on effect on the risk profile of the country. The expectations is that after the elections and, hopefully with little or no fracas, more confidence will return to the economy and portfolio investors will return. And with the oil market witnessing marginal but definitive rebound, we are likely to witness confidence boosting accretion to the reserves. With the reserves once again growing, stability is bound to follow and the country should expect to be back once more to business as usual. The consensus is that the decision taken to close the auction window could not have come a moment soon and if there is any observation to make, it is that it could have been done earlier and the Central Bank must always bear in mind that the best way to stop speculators in their track is to get them burn their fingers by losing massively.
• Dr. Boniface Chizea wrote from Lagos