The New Forex Ban and its Short Term Market Reaction

August 5, 2021/Proshare

By FDC Ltd

Image Credit: pagetutor.com

The CBN in a twist of events has discontinued its forex sale to BDCs with immediate effect. This announcement was made by the CBN Governor during the question and answer segment of the recently concluded monetary policy committee meeting on July 27. 

Immediate Reaction

By the next day, the parallel market rate had plunged to N522/$ and then N525/$ as the markets tried to process the implications of the CBN’s decision on businesses. Since then, the naira has gradually appreciated, to currently trade at N508/$ (August 4). Other market rates have also appreciated. For instance, the IATA rate (the exchange rate used by airlines to issue tickets) moved from N460/$ to N412-N413.

How Does the New Forex Ban Affect You?

Since the CBN is expected to shift the forex supply previously sold to BDCs to the banks, we expect to see an increase in volume and turnover in the banking segment of the forex market, making dollar sales more accessible to the public. This will lead to an appreciation of the exchange rate for invisibles such as PTA, BTA, tuition etc.

Also, the parallel market rate depreciation will continue albeit temporarily, leading to a widening of the forex market premium. However, as the market adjusts to the new forex ban, the spike in the parallel market premium will fizzle out, leading to a convergence of rates around the IEFX window.

Final Thoughts

The banks will benefit from the increased forex supply from the CBN and in return record an increase in transactions. However, the cumbersome documentation process required by banks will remain a challenge for the public. We expect the markets to adjust to the new norm, while the BDCs will be forced to survive or become extinct in the new forex market era.

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