The 2016 Nigerian budget’s expectation of earnings of N820 Billion ($4 Billion) from oil exports in 2016 was based on a production assumption of 2.2 million b/d and a benchmark price of $38/barrel. The N 6.07 trillion ($30.1 Billion) budget proposal for 2016 was predicated on the said benchmark, at the then prevailing official currency exchange rate of N197 – $ 1.
Global prices of crude oil have risen to circa $ 50/barrel from an all-time low in January 2016 of $ 27.10/barrel for Brent crude (the bench mark price for Nigerian crude) and well above budgetary benchmark of $ 38/barrel and thus potentially increasing revenue from oil exports, well above the aforesaid budgetary estimate.
However, the inability of crude oil production to meet daily production targets for prolonged periods in 2016, due to shut downs arising from pipeline vandalism and sabotage of oil infrastructure through militant activities has resulted in an extreme drop in oil revenue earnings. In consequence of this, the Central Bank of Nigeria (CBN) decided to review its longstanding fixed exchange rate regime in order to reduce the severe pressures on Nigeria’s external reserves, alleviate the foreign exchange supply crisis and address the considerable gap between the official and the unofficial (real market) exchange rate.
The CBN on May 24 2016 announced a flexible exchange rate regime aimed at making foreign currencies more accessible. With this action, the CBN nullified the official exchange rate regime of N197/dollar. By this development, the interbank foreign exchange market, which had been dormant for some time, was revitalised on an unrestricted exchange rate basis, while the Bureaux de Change, (BDC), would continue their operations, thus creating multiple exchange windows. Although the CBN would not permit the BDCs to purchase dollars from the interbank market. The markets opened in June 2016 with the flexible official rate at $1 – N280 and the unofficial rate at $1 – N340.
The technical details of the new system are as follows:
A. Market moving to single market through inter-bank via a Reuters / FMDQ order matching system with 10 primary dealers (two-way quote mechanism) and other secondary dealers.
NB. FMDQ -The Financial Markets Dealers Association, an association of the treasurers of banks and discount houses in Nigeria, commenced the project to create a self-regulatory organisation (SRO) in 2009 with the primary purpose of deepening the inter-bank OTC market trading in various securities and products. Thereafter the association promoted the formation of FMDQ OTC PLC. The company was licensed by the Securities and Exchange Commission, SEC, as a self- regulatory organisation, SRO, to organise and provide oversight on the Over-the-Counter, OTC, market in the Nigerian capital market in November 2012)
Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.
B. Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.
C. Proceeds of FDI (Foreign Direct Investment) shall be purchased by authorised dealers at the daily inter-bank rates.
D. Non-oil exporters are allowed unfettered access to export proceeds via the interbank rates
E. 41 items formerly constrained by CBN will still not be eligible for trade on interbank
F. To enhance liquidity, CBN may offer long dated 6 – 12 months’ forwards to authorised dealers. Forwards must be traded backed with no authorised spreads
G. A new product was introduced, namely the authorised NGN futures on the FMDQ OTC – which will allow non-standardised amounts, no fixed dates or tenors allowing businesses to hedge. Futures will be NGN settled.
It was expected that this would result in a drop and eventually herald the demise of the unofficial (real market) rate as anyone and everyone would be able to buy dollars at any bank or with authorised dealers at a market determined price.
Some volatility was anticipated but It was anticipated that over time, investors and businesses who were reluctant to import dollars into Nigeria would be encouraged to bring in their forex at a price they believe is market determined. That this would enhance liquidity over time.
The volatility did however exceed expectations as the rates fell sharply in the wake of the announcement between June – September 2016. There remains an appreciable gap between the official and the floating (official) rates and the unofficial rates. This has been a major concern for Nigerians and foreign investors alike and confidence in the Naira has been severely dented with the official flexible rate falling sharply to its currently prevailing rate at $1 – N315.25 and the unofficial rate at $1 – N468 on 14/10/2016.
However, it must be said that in many countries where a full float was launched, the value of the home country’s currency did plummet woefully before it found its level. However, the rates between the inter-bank market and the parallel market did narrow and although, this has not yet happened appreciably in Nigeria, economic experts expect that it will also replicate in Nigeria.
The CBN Governor has not dwelt on the controls currently in place such as limits to withdrawals of dollars from your bank domiciliary accounts or spending limits when abroad. However, it is expected that the severe limits will be removed in due time as the market becomes more liquid.