Daily Independent (Lagos)
Rotimi Durojaiye
8 July 2009
Lagos — Liberalisation of the foreign exchange (forex) market began on Tuesday with the Central Bank of Nigeria (CBN) removing all restrictions recently imposed.
Monetary Policy Rate (MPR) was slashed by 200 basis points from eight to six per cent.
There is now a corridor of interest rates of +/-200 basis with the rate on standing lending facility at eight per cent and the rate on standing deposit facility at four per cent.
The CBN had announced in May that it would remove restrictions from forex activities and liberalise the market within three months.
At his maiden briefing on the MPC meeting on Tuesday in Abuja, CBN Governor, Lamido Sanusi explained that interest rate was slashed after realisation that the spread between lending and deposit rates was higher than interest rate.
He recalled that "in the first few days of July, the inter-bank call rate ranged from 21 to 22 per cent. The weighted average open buy back rates in April, May and June were 7.1, 7.2, and 7.7 per cent, respectively.
"The average spread between the call rates and the rates on secured transactions has been very high at 1,090 basis points in June, 600 basis points in May, and 540 basis points in April.
"The average prime lending rate rose from 19.34 per cent in April to 19.53 per cent in May while average maximum lending rate declined from 23.17 per cent in April to 22.86 per cent in May.
"The weighted average rate on all categories of deposits rose from 5.98 per cent in April to 6.13 percent in May.'
To ensure that the inter-bank market is rendered efficient, and to reduce counterparty credit risk, the CBN will provide a temporary guarantee from July 8 to March 31, 2010, he added.
"The (CBN) would also impose a limit on the total volume of gross inter-bank loans extended to an individual institution. A guarantee fee will be charged if the guarantee crystallises at five percentage points above the interest rate at which the loan was contracted.
"Coinciding with the above and in order to foster financial stability,' Sanusi emphasised, "banks are expected to publish their accounts with sufficient disclosure to allow for risk assessment and analysis by creditors and investors by the end of March 2010.'
In view of the fact that high lending rates are not consistent with the objectives of growth, inflation control, and financial stability, the CBN would encourage banks to bring down lending rates in line with the economic realities, he said.
"It is also important that the yield curve is normal with long term yield rates carrying reasonable premium over the short term market rates.'
However, in liberalising the forex market, Sanusi explained, all class 'B' bureaux de change (BDCs) may now participate directly in the CBN window, but "only those with valid licences are eligible,' and will deposit $20,000 each.
The capital of Class 'A' BDC has been reduced from N500 million to N250 million.
Allocation of forex will differ in magnitude between Class 'A' and 'B' BDCs, given the different levels of capitalisation.
Sanusi also disclosed that the Wholesale Dutch Auction System (WDAS) will replace the Retail Dutch Auction System (RDAS).
"The MPC noted with satisfaction that recent measures to stabilise the Naira exchange rate have posted some positive outcomes. The Naira exchange rate has stabilised at the RDAS in recent weeks while in the other segments, the rates have appreciated, thereby narrowing the arbitrage opportunities.'
But he pointed out that the premium over the RDAS rate has remained significant, which offers an opportunity to narrow the gap between the two rates by liberalising the inter-bank forex market.
Sanusi said forex reserves by July 3 slumped to $43.19 billion (provisional), compared with $53 billion last December.
"The decline in reserves mirrored mainly the relative downward drift in international crude oil prices from the levels reached in mid-2008 and the slowdown of other foreign exchange inflows.'
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