A raft of policy initiatives being implemented by the Central Bank of Nigeria (CBN) lately has seen the gradual but positive rebirth of the trembling but weak naira, reports Ibrahim Apekhade Yusuf
According to received wisdom out there, the naira is bouncing back in a manner of speaking, thanks to the plethora of policies being implemented by the apex bank.
Chief among the policies by the apex bank is the commencement of the clearance of forex backlogs to banks, airlines and other parties, The Nation can authoritatively report.
The news media was awash with reports that the apex bank had begun to clear some of its foreign exchange backlogs.
Hints that the federal government was determined to turn the tide in the way things are was affirmed by President Bola Tinubu when he addressed the packed audience at the 29th Nigerian Economic Summit in Abuja recently.
Tinubu at the forum acknowledged the challenges faced by the business community in the financial markets and assured them of additional foreign exchange liquidity to restore market confidence.
On clearing the FX backlog which has drained investor confidence, the president said, “All foreign exchange future contracts will be honoured by this government.”
“I assure you we have a line of sight to the foreign exchange we need to refloat this economy. And we will get it,” he added.
In the view of the Minister of Finance, Wale Edun, the amount of overdue forward payments is estimated at $6.7 billion.
From available information, the CBN reportedly settled some of its FX obligations with certain banks such as Citibank, Stanbic IBTC, Standard Chartered, among others. This move seemed to have added some impetus to the naira.
In separate statements obtained by The Nation, some of the beneficiary banks confirmed the payment of FX forwards by the CBN.
Stanbic IBTC in a statement said, “Yesterday, the apex bank began clearing the backlog of outstanding Retail SMIS obligations. The total amount cleared is yet to be ascertained.”
Also, Citi in a statement issued by its Treasury and Trade Solutions department, exclaimed, “CBN HAS DONE IT.”
The bank impressed on its customers the need to liaise with their respective Relationship Manager or Trade Service Professional for clarification on the matter.
The circular titled ‘Settlement of Matured FX Forwards by CBN’, said, “We have been directed to inform you that the CBN has delivered all outstanding matured forward forex.
“We thank you for your patience and cooperation and value you for your business and partnership. Please speak with your Relationship Manager or your Trade Service Professional for clarification and additional details.
“It is a gradual payment that was done secretly, CBN didn’t make a fuss about it. It started yesterday and continued all through the night.”
The source added that paid banks represent a small percentage of outstanding FX forwards with the largest percentage mostly in tier 1 banks yet to be settled.
He, however, expressed hope that they will be settled in the next tranche, maybe with a lower percentage.
The CEO of a Tier 2 bank who does not want his name mentioned, also confirmed that his bank received $100m from the CBN, expressing confidence that the outstanding would soon be settled.
He said, “As I speak with you, our bank has been credited with $100m by the Central Bank and we are confident of getting the balance soonest. This is a positive development for the economy and trade in particular.”
However, there are commercial banks in the system that are not happy with the CBN because they have yet to receive any credit alert.
Thumbs up for CBN
While commenting on the development, the Association of Corporate Treasurers of Nigeria said the decision to settle matured foreign exchange forwards is a significant step in promoting stability and confidence in Nigeria’s foreign exchange market.
The association comprising all corporate treasurers in Nigeria in a statement obtained by our correspondent said the action demonstrates the apex bank’s commitment to ensuring the ease of doing business and reducing uncertainty in the market.
A statement signed by the association president, Adeyinka Ogunnubi, which reads in part, he said, “The ACTN believe that the timely settlement of matured FX forwards is crucial for our members and the broader business community. It allows our corporate treasurers to efficiently manage their foreign exchange risks and plan for their financial obligations.
“We recognise the CBN’s responsiveness to the concerns of businesses and its continued efforts to implement policies that enhance the resilience of the Nigerian financial system.
“As an association dedicated to advancing best practices in corporate treasury management, ACTN will continue to work closely with regulatory authorities to support policies that foster transparency, predictability, and stability in Nigeria’s financial markets.”
The Director General of the Nigeria Employers Consultative Association, Mr Wale Oyerinde is also on the same page with Ogunnubi.
According to the NECA boss, the actions of the new administration of the CBN have shown tremendous improvement in the FX management.
He said, “Well, there is no doubt that the economy lacked the requisite FOREX to completely close down the outstanding matured FX in banks. However, the actions of the new administration through the CBN have shown tremendous improvement in FX management, which was a huge challenge in the last administration. The current CBN management has stepped up forex intervention in the FOREX market, which is now accounting for 75 per cent delivery of the matured FX. While we commend this action and the determination to clear all the standings, we hope that this effort will be sustained. The sustainability of this intervention will largely depend on the guarantee of FOREX inflow from all available sources. With stable, focused and growth-induced reforms, another opportunity for FOREX like increased FDI will be enhanced,” Oyerinde added.
Also speaking, the immediate Vice President of the Manufacturers Association of Nigeria, Lagos Zone, Mr John Aluya, said he is yet to be informed of any of their members whose backlogs have been cleared.
Aluya, who is also a current member of the National Council of MAN, noted that if the initiative is properly implemented, it will help to improve the system. But he said that commercial banks may likely frustrate the move by the apex bank.
“But if this move is well implemented, it could be an initiative that could be done in such a way that it will be an improvement in the system. But I will tell you that for every step the CBN takes the big elephants in the house are always there to truncate it and if the CBN is not careful the big elephants will also truncate this move that they are about to make. The big elephants I mean are the commercial banks. They are the people who have always made our exchange rate unreliable because they benefit from it. When you talk of the I&E window you bid for it but manufacturers do not enjoy the window, because the banks will tell you that you will bid for I&E at CBN rate, and they will give you another account to pay the difference into and that is truncating the system.”
The Chairman of the Nigerian Economic Summit Group, Mr. Niyi Yusuf, said, “This is in the news and it’s useful that the administration is delivering on its public commitments which should help to improve public confidence. It’s a good signal and a right step to rebuilding trust and confidence,” he concluded.
The Chairman of the Nigerian Association of Small and Medium Enterprises, South-West region Chairman, Solomon Aderoju, queried if the payments would get to the end users.
He said, “Will it get to the end users? How much have they cleared? If it will get to the importers and the end users, then, it’s a good development. If not, then, it’s still the same story. Nigeria’s problem is multidimensional. Even with the 43 items that they removed, are the importers now getting the forex from the banks? I am sure they are still using the black market.
“Over the years, we have been using the foreign reserve. The reserve has been depleting over the years because we are not adding anything to export. It’s the only export that can add to the reserve. So, it’s a deficit account.”
$10b largesse to uplift naira
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, said that the country was expecting about $10bn inflows in the nearest term, which would help to clear foreign exchange backlog and stabilise the naira.
Finally naira rebounds
In what may have become a positive reawakening, the naira has risen to N1,120 against the dollar as the foreign exchange market reacted to news that the CBN has begun to clear some of its FX backlog on Thursday.
This represents an appreciation of N50 or 4.27 per cent compared to the N1,170 it traded for last Wednesday.
A cross section of local forex dealers during a chat with our correspondent in Lagos revealed that the naira was recovering well after making a quick recovery from N1,170/dollar in the morning to close trading at N1,120/dollar.
The naira in Lagos recorded an average of 1,120/$ on Thursday, appreciating to 1,040/$ and 1,125/$ in different locations on Thursday. It traded at 1,170/$ on Wednesday. In Abuja, the average price of the naira against the dollar was 1,200.
Also the president of the Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, confirmed that the dollar closed trading at N1,120/dollar on Thursday.
He attributed this to the CBN’s move to clear some of its backlog.
He said, “It is closing at N1, 120. Even yesterday it came down to N1,150. Today, it started at N1,170 but it is closing at N1,120. Yes, this is because of the CBN’s move to clear its backlogs. There is a kind signal in the market. The CBN should continue to make clarifications.”
He said, “The naira is improving but very high compared to what we were trading before the current administration.”
He further lamented that there was a significant crash in the parallel market, forcing traders to stop sales of dollars.
He said, “We experienced significant loss today as the dollar suddenly crashed. Most of us have stopped for now to see what the market holds. If it reduces tomorrow, we may have to sell at a loss.”
JP Morgan’s blessed assurance on rebirth of the naira
Expectedly, JPMorgan Chase & Co has hinted that the Naira to US dollar exchange rate will eventually strengthen towards N850 by year-end as the combination of tighter policy, as well as more attractive rates and FX levels deter incremental dollarisation and perhaps attracts some foreign capital.
This is even as JPMorgan expects Nigerian authorities to maintain a willingness for greater flexibility of the exchange rate. Though it said that while a strengthened naira against US dollar exchange rate is crucial, “the large backlog of unmet FX demand and low net FX reserves makes the job challenging”.
“The Central Bank of Nigeria (CBN) appears willing to once again allow a flexible exchange rate without the use of moral suasion to limit the upside. This was initially the case during the first attempt at re-caliberating the FX market, however those efforts lost steam due to inflation concerns.
“We believe recent efforts to restore a flexible FX regime may be sustained given the willingness to accompany it with tighter monetary conditions. The interbank FX rate has risen in recent days to over N900, from N750, thereby significantly closing the gap to the parallel rate which is now just above N1,000,” JPMorgan Chase & Co noted in its November 1 note titled “Nigeria local markets strategy: Getting set for re-opening.”
While noting that unifying the various FX windows and eliminating the longstanding list of ineligible transactions helps simplify the FX policy framework, JPMorgan said that due to still limited FX liquidity in the official market, and the fact that naira isn’t a fully convertible currency, “some FX demand will inevitably find its way to the parallel market.”
“In our opinion, when authorities refer to the FX backlog, they are actually referring to US $6.8billion in FX forward commitments which the central bank has not honored – the majority of which has been covered by commercial banks.
“However, we estimate there is up to a further $$3-4billion (probably less given the FX adjustment) in unmet FX demand needed for goods and services imports. CBN will need to clear both backlogs, a difficult task given the low levels of net FX reserves.
“We previously estimated that Nigeria’s net FX reserves could be as low as $3.7billion at the end of 2022. We do not have new information about the central banks short-term contingent liabilities, however gross FX reserves have further declined by $4.1billion through this year and now amount to around $33.3billion, suggesting the net position could be lower,” JPMorgan noted further.
According to JP Morgan, “The government is hoping to secure up to US$10bn in FX inflows over coming months in a bid to clear a substantial portion of the FX backlog and improve market liquidity. Media reports suggest this is split between US$7bn from the securitization of future gas dividends to the government, and US$3bn from the securitization of future oil-related dividends.
“The ability of the government to raise such amounts via these channels may be challenging given the US$3bn expected from Afrexim has been delayed for months, while Nigeria LNG Limited’s historical dividends to the government have fallen well short of US$2bn annually. It also doesn’t help that the NNLG Managing Director recently confirmed that the company is operating at 50% capacity on its Train 1-6 fields and plans to expand its processing capacity with Train 8 is no longer feasible. “
That said, the government appears to be in the final stages of agreeing a US$3.5bn package with the World Bank (part of which would be direct budget support, while the rest will be project-linked) with other reports suggesting funding from sovereign wealth funds in the middle east may be on the cards.”
“Indeed, as we have noted previously, the CBN appears to be in the process of normalizing monetary policy, despite the fact that a monetary policy committee (MPC) meeting hasn’t held since July. Assuming the OMO auctions are held on a more regular basis, we expect it will result in tighter liquidity conditions, which will in turn help slow dollar demand,” JPMorgan Chase & Co said.
JPMorgan Chase & Co said its economists expect the CBN to keep the policy rate unchanged at 18.75percent for the foreseeable future. “While optically and for signalling purposes, this may appear odd, especially if the OMO rate is set above 21percent for an extended period, it may be a necessary compromise given the political sensitivity and preference for lower interest rates (recall the President’s inauguration speech signaling the need for lower interest rates, see here) particularly as the MPR should typically serve as the base rate for bank loans. Similarly, the CBN might also remain cost conscious by not wanting to pay significantly higher rates on both OMOs and SDFs. In effect, the policy rate won’t matter if short-term rates can move nearer 25percent in order to narrow the current negative real rates while continuous OMO auctions and CRR debits can help to further tighten liquidity conditions, ease FX and inflationary pressures,” it noted.
It noted further that given that domestic debt makes up around 62percent of Nigeria public sector debt, “a further rise in interest rates will increase the interest burden, even as authorities explore ways of improving oil and non-oil revenues. Higher interest rates will also come at a cost to the central bank, a cost which will eventually be absorbed by the federal government.”
