Understanding Key Aspects Of CBN’s New Forex Policy

The Central Bank of Nigeria has been hailed by analysts for abandoning its Naira peg rate for a more flexible exchange rate, after previous refuting the decision even as its external reserves plunged and inflation surged to a six-year high.

Here are the key aspects of the new forex guidelines.

CBN will participate in the market through periodic interventions to either buy or sell forex.

The central bank periodic interventions, would allow the CBN to regulate possible market imbalances, either to prop up Naira against the US dollar or to lower the Naira to stimulate the economy through exports. This will also allow the central bank to manage the activities of Forex Primary Dealers (FXPD), since there is no predetermined spread between the CBN and FXPD, which means spread can also be adjusted to accommodate the current market situation.

CBN to introduce non-deliverable over-the-counter naira-settled futures.

The introduction of non-deliverable forward, perhaps is the most unique of all the guidelines, one because it will help curtail the loophole created in the previous forex policy that allow speculators determine the exchange rate at the parallel market, and also encourage businesses and investors to hedge against eventualities. Hence, eliminate hoarding due to fear of uncertainties.

What this means is that, if you need forex transaction in December, you can peg your foreign exchange rate at let’s say N250 and if in December exchange rate is N270, the central bank will offset the N20 gap, such that you are not losing any money.
“But if the rate on that day is lower than the deal date rate, you’ll pay the Naira equivalent.”

Again, it will encourage capital importation from foreign investors, since they can now hedge against a further plunge in oil prices and at the same time buy forex at a predetermined rate to remit proceeds.
Non-oil exporters now allowed unfettered access to their FX proceeds.

Another bold move, is allowing non-oil exporters unbridled access to their FX proceeds, this initiative has officially brought back diversification agenda to the table and indicate the readiness of the government to tackle Nigeria’s mono-crude oil status. Especially, knowing that non-oil sector contributed 89.71 percent to the first quarter GDP, after falling 5.77 percent, the highest in years.

However, this does not mean gauge of consumer prices (inflation) will drop from the current 15.6 percent, if any changes it might surge to 16 percent in the second quarter pending the time the current policy would have filtered through key industries.
Overall, the flexible exchange rate will once again position Nigeria as an investment destination, boost job creation, enhance importation, increase consumer confidence and modulate consumer prices in the long run if wellimplemented.

Source:- investorsking