Financial markets in contradictory response to new FX policy

There were contrary trends in the financial market yesterday, just a day after a major policy change by the Central Bank of Nigeria, CBN, reinstated the 43 items it had excluded from its foreign exchange supply window.

At close of trading in the Investors and Exporters (I&E) window of the foreign exchange market yesterday, the local currency traded in the range of N764.51/ $1.0 down from N759.20/ $1.0 the previous day. In the parallel market the local currency depreciated to N1045/ $1.00 from N1043/ $1.00.

However, in the stock market, traders hinted that the policy change by the CBN signals further boost of confidence in the economy and this led to a 10 base point rise in the All Shares Index, ASI, to 67,200.69, the highest point since September 22, 2023.

Commenting on the stock market development, analysts at CardinalStone Finance, a Lagos based investment banking firm, stated: “ We opine that the positive market sentiment may not be unconnected to the CBN lifting restrictions on the 43 earlier FX-restricted items and reiterating its commitment to improving FX liquidity.

However, they stated further: “To our minds, this is a move to gradually improve confidence in the FX market, which has been weighed by long-dragging illiquidity and unorthodox policies. We recall that the lifted ban was instituted due to a material plunge in FX inflows. Thus, to forestall the re-occurrence of the underlying drivers of dollar demand management and unorthodox FX policies in Nigeria, the supply of FX will have to improve sooner rather than later.

“To improve FX supply, the CBN and fiscal authorities may have to evaluate the possibility of raising dollar facilities (via Diaspora bonds, Eurobonds or concessionary loans from bilateral/multilateral institutions), asset sales (full or partial), among others. Curbing oil thefts, enhancing domestic oil production efficiency, and issuing new oil mining licenses are potential short-to-medium solutions.

“All in, we believe that the efficacy of the new policy is likely to be subject to the extent of improvement in FX supply at the I&E window. This view considers the anticipated increase in FX demand at this window following the lifting of the ban”.

Also dissecting the FX policy reversal, analysts at Meristem Securities Limited, another Lagos based investment firm, said, “While this is a welcome development aimed at easing FX pressure and curbing arbitrage activities in the parallel market, its short-term impact may be minimal owing to the limited FX inflow.”

Meanwhile, an economist and Director, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has applauded the decision of the CBN to lift the ban on official sale of foreign exchange (forex) on 43 items, describing it as a move in the right direction.
In a statement made available to Vanguard, Yusuf said that the ban had contributed to the distortions in the forex market.

His words: “We welcome the decision of the CBN to discontinue the forex exclusion policy on the 43 items. It is a move in the right direction. It is part of the policy normalisation process. “The exclusion of the 43 items was one of the several drivers of distortions in the forex market. The exclusion of the items also contributed to the persistent divergence in rates between the official window and the parallel market.

“The exclusion was also in conflict with extant trade policy as the items were not under import prohibition in the first place. It was an example of lack of policy coordination under the previous administration.

“The new directive will also improve transparency and disclosures in foriegn exchange transactions.”

He called on the apex bank to avoid market suppression tendencies, especially outside the I&E window.

“All policy impediments to forex inflows should be removed,”, he stated.

Yusuf also added, “The fiscal authorities should continually monitor the economic landscape to shape the character of fiscal policy measures to regulate imports in line with comparative advantage principles. We need to worry about the risk of import surge.

“There is also need to upscale the use of fiscal policy measures to boost domestic production and productivity.”

CBN, had in a circular on Thursday, restated its commitment to boosting liquidity in the forex market while removing the earlier restrictions it imposed on some 43 items from accessing forex through its official windows.

The circular signed by the apex bank’s Director of Corporate Communications, Dr. Isa AbdulMumin, stated: “The Central Bank of Nigeria (CBN) will continue to promote orderliness and professional conduct by all participants in the Nigerian Foreign Exchange Market to ensure market forces determine exchange rates on a Willing Buyer – Willing Seller principle.

“The CBN reiterates that the prevailing Foreign Exchange (FX) rates should be referenced from platforms such as the CBN website, FMDQ, and other recognised or appointed trading systems to promote price discovery, transparency, and credibility in the FX rates.

“As part of its responsibility to ensure price stability, the CBN will boost liquidity in the Nigerian Foreign Exchange Market by interventions from time to time. As market liquidity improves, these CBN interventions will gradually decrease.

“Importers of all the 43 items previously restricted by the 2015 Circular referenced TED/FEM/FPC/GEN/01/010 and its addendums are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market.

“The CBN is committed to accelerating efforts to clear the FX backlog with existing participants and will continue dialogue with stakeholders to address the issue.
“The CBN has set as one of its goals the attainment of a single FX market. Consultation is ongoing with market participants to achieve this goal”.

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