By Alex Chiejina
LAGOS (Sundiata Post) – Seven banks namely First Bank of Nigeria, Zenith Bank Plc, GTBank Plc, UBA Plc, Access Bank Plc, Diamond Bank Plc and Union Bank Plc are likely to be appointed by the Central bank of Nigeria as Foreign Exchange Primary Dealers (FXPDs), Sundiata Post investigation has revealed. Although none has been appointed by the apex bank yet, these banks as FXPDs if appointed, could imply they control a relatively higher proportion of FX market volumes, which should be positive for their NIR line.
These banks can also have short positions up to 10% of shareholders’ funds at the close of each day (from 0.5% currently), implying their trading bias should be to see the naira appreciate.
From the CBN guidelines, the apex bank intends to introduce FXPDs as registered authorised dealers designated to deal with the CBN on large trade sizes on a two-way quote basis. To qualify as an FXPD, a bank is required to meet at least two of the three conditions – have a minimum shareholders fund unimpaired by losses of at least N200 billion, minimum of N400 billion in total foreign currency assets and minimum Liquidity Ratio of 40 percent.
According to a leading U.S. money centre bank in a note just released, the naira is projected to trade between N280-300 against the dollar, while the parallel market rate will stabilise. The supply of forex is also expected to increase. This implies that the new exchange rate is unlikely to depreciate lower than the parallel market rate. In anticipation of Monday’s new rate, the naira appreciated from N365/$ to N340/$ in the parallel market.
This market is a marginal and fringe segment of the total market. It is also not a true reflection of actual demand but is influenced by speculation, uncertainty and arbitrage activities. One of the expected outcomes is that price leadership will now rest squarely within the regulated market segment. This will be influenced to a large extent by the CBN. The CBN supplies over 70 per cent of foreign exchange to the markets.
Charles Enoch, Deputy Director, Monetary and Financial Systems Department, International Monetary Fund, said that the shift to exchange rate unification has been part of a broader adjustment programme to enhance financial stability and growth.
According to him, the decision to unify exchange rates was not part of a well-defined strategy, but instead occurred in the context of a crisis; when in the absence of fundamental reforms, parallel market premiums widened significantly, making the system unsustainable.
In his paper titled “Moving to a Wholesale Dutch Auction System: Country Experiences”, a review of exchange rate unification has shown that in most cases, the trigger for unification was macro-economic instability and low growth. Foreign exchange markets were characterized by a rationed official market with a fixed exchange rate and an active black market, with the floating rate carrying a high premium.
According to Enoch, successful unification was more likely when the reforms were part of a comprehensive package, involving macro-economic adjustment (particularly fiscal discipline and credible anti-inflationary policies) and structural reforms, including trade and market liberalisation.