RDAS Scrapped February 18, 2015

Transcription

1 + RDAS Scrapped February 18, 2015 Interbank Forex Market (IFEM) Launched

2 + RDAS Scrapped Nigeria is only one of 34 countries out of 195 in the World still using Multiple Exchange Rate (MER)

3 + Old Forex Market Structure Price Discriminating Monopoly With 3 segments CBN main seller & many buyers Same product, different prices Leading to financial osmosis Supplier: CBN Supplier: CBN, IOCs, Exporters Supplier: CBN, Foreign Investors RDAS A Interbank B Parallel C

4 + Old Forex Market Structure Price Discriminating Monopoly Rent seeking & Round trippers paradise Buy in market A Official at N168/$ Sell in market C Parallel at N215/$ Profit for doing nothing = N47/$ Subsidy element

5 + New Forex Market - 2 Segments CBN has Converged markets and rates 2 segments only Interbank & parallel markets Many sellers, many buyers Pure competition Rates convergence Reduced arbitrage opportunity

6 + New Forex Market - 2 Segments Increased efficiency Part of wider agenda of trade & financial system reform Mechanism: 2 way quote Bid/offer Parallel Interbank

7 + New Forex Market - 2 Segments Sellers CBN Banks Hedge funds IOCs Exporters Visiting friends and relatives Buyers Corporates Individuals Students IFEM Medical tourists Manufacturers Others Sellers Hotels Tourists Parallel Exporters not using L/Cs Reverse hot money Market Size is approximately $40.65bn (Total RDAS plus 25%)

8 + Exchange Rate Unification Implications of a Managed Floating System Old Structure New Structure Market structure Price discriminatory Pure competition Price Differential 27% 5% Outcomes Aggregate demand for forex will fall Aggregate supply will increase Price system will be efficient

9 + Orthodox Forex Market Transition Allocation Auction (Wholesale & Retail) Interbank Full Convertibility This typically leads to an efficient forex market

10 + System - Wide Impact Higher revenue for States & FGN- devaluation effect Removal of exchange rate subsidy for individuals and corporates Effectively cutting disposable income Subsidies are reverse taxes More efficient exchange rate determining mechanism A prelude to full convertibility Major boost to non-oil exports

11 + Impact - Individuals & Corporates Market structure has changed from a price discriminating monopoly Towards pure competition Moving currency towards fair value Convergence in market rates between IFEM and BDCs Expensive dollar means lower demand In the long run, BDCs are cut out

12 + Why did the CBN do it now? There is never a good time to adjust a currency to its fair value It is always better late than never Inflation in naira zone is 8.3% 0.8% in the US dollar zone Currency adjustment was imminent and inevitable External reserves are down to $33bn 25% below the safe adequacy level Only 10%-15% of transactions were covered by the subsidized RDAS rate

13 + What is the impact? Corporates Cost of imported raw materials will increase Part of the cost passed on consumers Global commodities are down 21.7% YoY Devaluation is not inflation neutral Profit margins of companies to be compressed Expect approx. 15% decline in corporate earnings

14 + What is the impact? Individuals International airline tickets are 20% up already Some parents will bring kids schooling abroad back home Improvement in quality of local schools & hospitals

15 + Outlook Exchange rate will depreciate and converge to approx N215/$ May begin to appreciate marginally Market liquidity will improve Currency pressures will decline As speculative activities and rent-seeking reduces External reserves erosion will slow

16 + Thank You