Analysts fault CBN’s new FX market management

• CBN distorting FX market with fiat actions

Financial market analysts say they have found some fault lines in the Central Bank of Nigeria’s (CBN’s) management of the foreign exchange reforms put in place by President Bola Ahmed Tinubu that are serving as a distorting influence on the full attainment of the goal of the president for the foreign exchange market.

Following the directive by President Tinubu to the CBN to work towards unifying the opaque exchange rates structure in the country, the apex bank had immediately issued a policy circular in which it stated that it was instituting a ‘willing buyer, willing seller’ framework for the market, which many analysts interpreted to mean that going forward the interplay of demand and supply would determine the rates at which transactions are to be done between buyers and sellers.

But one banker-analyst has pointed out to Business A.M. that the CBN is continuing to carry itself in the market in such a way that makes it impossible to achieve the goal of a free market for the pricing of foreign exchange by buyers and sellers subjecting themselves to the dictates of demand and supply.

“The actions of the CBN have been completely at variance with the establishment of a foreign exchange market where the forces of demand and supply, and by implication the willing buyer, willing seller model is allowed to operate,” Steve Morka, a retired banker and financial analyst said in a note to Business A.M.

Morka suggested that it would appear as if the apex bank was struggling with transiting from the allocation model to a market-based model.

President Tinubu had campaigned on unifying the multiple exchange rates in the country which had long been heavily criticised by analysts and business operators locally and by international analysts and institutions such as the World Bank and the International Monetary Fund (IMF), among several others.

The president had said during his campaign that he looked forward to a Nigeria where there is a unified exchange rate determined by market forces (free float exchange rate system), a system that will not have the government and regulatory bodies intervening in the management of the exchange rate.

The multiple exchange rates were linked to massive corruption, including forex round tripping and arbitrage, but more internally, because they made planning difficult for business owners and operators in the economy.

Tinubu’s desire to eliminate this market distorting system in the Nigerian foreign exchange market had been acted upon immediately, following his swearing in on May 29.

The CBN issued a circular to move in the direction of the president’s campaign’s pledge, a move which immediately saw the rate close at a central rate of $1 = ₦632.27 on June 14, 2023, in the Investors and Exporters Window and the Official Market. The parallel market rate averaged $1 = ₦755.00 on that same day.

Other policy positions contained in the CBN circular announcing the move to a market determined exchange rate were the re-introduction of an order-based two-way quotes having a bid-ask spread of ₦1 and clearing of all transactions by a Central Counter Party as well as the cessation of the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme.

The CBN had specifically stated in its circular that it would be “reintroducing the ‘Willing Buyer, Willing Seller’ model at the I&E window, where all eligible transactions can access foreign exchange at their preferred rates”.

But analysts are now faulting this rhetoric and what is actually happening in the market, saying that the way the market is being managed is not allowing the ‘Willing Buyer, Willing Seller’ model to happen, adding that there is still a semblance of fiat in rate determination.

Specifically, they say the action of the CBN that involves calling banks to submit bids and then placing a cap on rates to bid “negates the concept of market forces, as this will only result in multiple exchange rates as evidenced in the wide gap already established between the I&E market and the CBN intervention rates.”

Morka said while not unmindful of the challenges the apex bank is grappling with on the supply side and the settlement of committed forward sales which are still outstanding, “nevertheless, this allocation approach will not help the situation, rather it will only create multiple prices in the market which is contrary to the objective of the foreign exchange rate unification.”

Calling out the CBN on specific example of its actions that appear now to distort the workings of a free currency market, the analysts point to the apex bank’s circular on wholesale intervention of July 24, 2023, noting that its action at the time was one of the latest actions “that is bound to create further distortions in the foreign exchange market.”

Explaining this, the analyst note read: “The circular which categorised banks based on Shareholders’ Funds for the purpose of the maximum amount the banks can bid will destroy efficiency and competition in the financial system. The six banks with shareholders’ funds of N350 billion and above who can individually bid for 12 percent maximum will jointly control 72 percent of the amount offered by the CBN, not because of efficiency or any market dynamics, but by the special grace of CBN categorisation.”

Analysts are asking what the CBN wishes to achieve with this market distorting action. Railing on the apex bank, they asked: “What does the CBN plan to achieve with this categorisation? Is this the way to create an efficient forex market? Is this the way to achieve a unified exchange rate? Is this the way to improve the efficiency of the financial system?”

Providing what seems like their own answer to the torrent of questions, they wrote: “Certainly not, as this same model was tried in the late 1980s and it failed woefully and had to be discarded after a few weeks of operation.

This failed experiment is what the CBN is recycling after over 30 years! Shouldn’t we be moving forward and embracing a market economy as stated by the president?”

Analysts are faulting the move by the CBN in what they claim appears to be its attempt to choose banks for customers, accusing it of pushing customers to certain banks, “irrespective of their efficiency, pricing, and other service and product offerings.”

They advised the CBN to learn from Ghana and Kenya, two countries with similar foreign exchange challenges as Nigeria, noting that both countries still have a system where there exists a single rate plus or minus a few percentage points.

“This is the time to enthrone a foreign exchange market where the interplay of market forces should dictate the exchange rate,” the analysts said in their note, adding that as a player in the market the “CBN can influence the rate by its active participation in the buying and selling process.”

They called on the CBN to stop any form of allocations, preferential allotments, categorisation of banks, and determination of exchange rates by fiat in the market.

“The foreign exchange market should be established and allowed to operate in a transparent and efficient manner where all the players should participate on equal basis without any one or group being favoured. Unification of exchange rates using market forces is the direction to go,” the analysts admonished the apex bank.