The Central Bank of Nigeria (CBN) new monetary policy is set to take off on Monday, June 20, 2016. Many Nigerians are already apprehensive on what will happen on Monday and the days after. Well, the truth is that no one really knows what will happen on Monday and the day after. All we can do is guess. So, here is our guess work on what will happen on Monday and beyond.
How the price discovery for the naira will occur
The Financial Market Dealers Quotation over the Counter (FMDQ OTC) is the trading platform on which the action will be taken place from Monday.
On Monday, what will most likely happen is that all those who have dollars in the country, especially, the oil companies and other major exporters of commodities will offer whatever amount of dollar they will want to sell for sale to the primary market dealers telling them how much they are willing to sell their stock of available dollars. Also banks and other dealers that have dollars to sell will quote a price at which they are willing to sell their stock of dollars. So may be Mobil will say it has $85 million to sell at say N370.
The buyers in the market, mainly importers of goods and services into Nigeria, will through their dealers, mainly banks, now put in a demand. Each dealer will come in with a quote, which will be how much they are willing to pay for the $85 million that is available.
So a UBA may bid N320, a Zenith Bank, N350 and a GTBank N380. Each dealer will bid based on how eager their customers need the dollars on offer. Naturally, Mobil will want to sell to the highest bidder on that day. So, in this case, Mobil may decide to sell to GTBank because it offered the highest bid.
The Days After
But that it is not that simple. On Monday, when this process starts, there is likely to be a limited amount of dollars on offer for those who need them to buy. In the last few weeks, CBN has been the main supplier in the market selling an average of $300 to $500 million every week which has never been enough to meet demand. There is an estimated $5 billon of unmet dollar demand since the CBN’s decision to ration the currency. It is not clear how much of this demand will hit the market on Monday.
The magnitude of this demand that hits the market on Monday and the subsequent days will largely determine the value of the naira. The CBN has tried to guide against too much of this demand hitting the market by introducing the futures market. So, hopefully some of this pent up demand will be diverted to that end of the market.
CBN will be sitting on the sidelines watching and will only likely intervene when it sees the naira taking a heavy beating. So let us say on Monday they demand suddenly forces the naira to a low of N500 due to low supply of the dollars in the market. CBN will now move and offer to sell some dollars to the primary market dealers in order to take some of the pressure from the market.
But the CBN will be careful about intervening since it has to watch its external reserves. If it intervenes too heavily and too quickly, it will run down the external reserves. So the CBN will likely intervene only when absolutely necessary.
So, Monday and the next few weeks, is likely to be a volatile trading period for the naira with the value likely swinging from one end to another. If it goes as high as say N500, you will likely see an influx of new dollar inflow, and a significant drop in demand. If it falls to say N250, you are likely to see a fall in supply and a rise in demand.
In between these swings, starting from on Monday and the days after, the dollar will eventually find its own value at a point only the market knows. But the CBN is said to have assured Buhari that the Naira may eventually trade at about N250 to the US$. That assurance is very very optimistic.