The recent announcement of a new Foreign Exchange(Forex) policy by the Central Bank of Nigeria(CBN), Nigeria’s apex bank, has stirred up reactions among pundits, with concerns around the stability of the exchange rate in naira/dollar terms.
Johnson Chukwu, the Managing Director of Cowry Asset Management, an investment company, maintained that there will be an initial stability and recovery of the naira value as soon as the policy becomes effective.
Recall that on June 15, 2016, the CBN released the long awaited Forex policy, which include among other items, the participation of the CBN in the Forex market through a single market to be operated through the interbank, liberalisation of the market, the introduction of additional risk management products offered by the CBN and Authorised Dealers to further deepen the Forex market.
Although he noted that the policy will bring about some stability in the short-term, achieving that in the medium to long-term will be dependent on a number of factors, which includes addressing the growing insecurity issue in the country, particularly in the Niger-Delta.
Chukwu was quick to say that the new policy eased the panic created by speculations and the delay in the release of the policy.
“On the naira value, initially by next week when the policy will be active, there will be recovery in the exchange rate but it will be temporary. Don’t forget that about $4 to $5 billion Forex demand is pending at the CBN official window,” Chukwu disclosed.
“The panic by some people who are warehousing and speculating will be removed. Those who held dollars will want to sell,” he continued.
The Cowry Asset Management boss also noted that creating an economic policy that is market oriented is critical in determining the sustainability of stability in the Forex market.
The pundit pointed that long-term stability of Forex will be derived if the Federal Government concessions critical infrastructures like the rail-lines, highways etc to Foreign Portfolio Investors(FPIs).
In his words: “The sustainability of the stability in the Forex market will be dependent on how quickly Nigeria is able to resolve the problems in the Niger-Delta; Nigeria is able to show that its economic policies are now market-oriented as well as the concessioning of some critical infrastructure.”
In concessioning the infrastructure, Chukwu noted that it is pertinent for the government to put in place policies and regulatory framework that would attract FPIs to invest in the infrastructural projects.
In terms of its impact on the parallel market, Chukwu said that the policy will bring some level of convergence in the exchange rate at the interbank market and at the parallel market, which will be sustainable as long as there is no limit to spread.
He argued that the restrictions of Forex placed on the 41 items would continue to stir up competition between the interbank and the parallel markets as importers of those items would always fall back on the parallel market for their Forex needs.
Chukwu also said that the introduction of the new Forex would impact positively on the capital market investors have had to bear the brunt of the economy on their investments.
He said: “The new Forex policy will have positive impacts on the capital market. It is no longer news that the Net Asset Value of most stocks listed on the Nigerian Stock Exchange(NSE) are low, where investors have been beaten by the current economic situation.”
Meanwhile, Nigeria’s apex bank disclosed that Forex Primary Dealers(FXPDs) will be appointed and notified by June 17, 2016 while interbank Forex trading under the new guidelines will begin on June 20, 2016.
