Epileptic Market

Babatunde Obaniyi

The activities of the foreign exchange market in Nigeria is a mixed grill of ups and downs
By Shedrack Ifurueze
Over the years, the emergence of the Nigerian foreign Exchange Market (Forex) named as the Secondtier Foreign Exchange Market(SFEM) was introduced in September 1986. This was trailed by the unified official market in 1987. The Autonomous Foreign Exchange Market (AFEM) in 1995, while the Inter-bank foreign Exchange Market (IFEM) debuted in 1999.
The first set of Bureau De Change (BDC) prior to the introduction of AFEM and IFEM was licensed in 1989 to accord and access small users of foreign exchange and enlarge the officially recognised foreign exchange market.
Exchange rates in the Bureau De Change are market determined. The parallel market for foreign exchange has been in existence since the exchange control era. It has been established that scarcity in the official sector and bureaucratic procedures necessitated the growth and development of the parallel market.
According to International Monetary Fund (IMF), the forex market is determined by some factors which include international reserves. These consist official public sector foreign assets that are readily available. They are controlled by the monetary authorities for direct financing of payment imbalances. They directly regulate the magnitude of such imbalances through interventions in the forex market.
Forex market no doubt is used in safe guarding the value of the domestic currency because foreign reserves are held as formal backing for the local currency. The timely meeting of international payment obligations will always assist in boosting a country’s credit worthiness which provides a fall back for the “rainy day.”
However, inspite of these laudable factors that determine the flow of forex market, the naira has continued to be under pressure as its demand for foreign exchange, especially the United States dollar has continued to outstrip supply.
Babatunde Obaniyi, Head, Market risk of Greenwich Trust Limited, Lagos, Nigeria told The Source that despite the Central Bank of Nigeria (CBN) continued commitment to stabilise the naira around the N150 +1-3 percent band, through various policy initiatives, the naira as a currency for foreign revenue has plummeted. The exchange rate, particularly to the dollar at moment has been hovering between N150 and N170. This has also made it very possible for Nigeria’s foreign reserves to nosedive to $31.2 billion. Obaniyi said that this is as a result of the CBN’s drawing down the exchange rate in order to defend the naira against major foreign currencies.
He revealed that in early July, 2011, the apex bank raised the dollar sale to BDC operators by banks from $250,000 per week to $500,000 and then to $1 million per week, in a bid to regulate the foreign exchange market.
The exchange rate gap which is over 10 percent has at present created in the forex market some restrictions which have resulted to round tripping. The CBN though has revised the restriction, yet it has lifted the restriction of the $1 million maximum limit that authorised dealers can sell to BDC operators from autonomous sources.
As Obaniyi noted, the decision to reverse was taken after a careful observation of reservation of recent happenings in the forex market so as to ensure exchange rate stability while narrowing the gap between the official and parallel segments of the forex market.
Looking at the future of the naira, feelers from market operators suggest a mixed outlook for the naira. In fact, it is expected that the naira will remain relatively stable at both the official and parallel markets and the CBN would continue to support the currency in the official market. Nevertheless, the deregulation of the downstream oil and gas sector may be a major risk and challenge.
A foreign exchange market analyst, Olaide Olatunji said the market is also expected to continue to factor in the current global crude oil prices. “Crude oil prices will determine the level of external reserves which in turn will determine the extent to which the CBN can continue to support the naira,” Olatunji stated.
According to him, the weak global economic outlook implies there is down side risk to the oil price, such that there is a strong likelihood that foreign reserves are likely to remain flat until the end of 2011 and the scope for a strong recovery in reserves in 2012.