A country’s currency remains its pride among nations. For many Nigerians with memory of naira exchanging above N520 to dollar at the parallel market nearly two years ago, the stability in the market now is a welcome development.
The impact of the Central Bank of Nigeria (CBN) policies on the local currency, including the introduction of Chinese Yuan into the intervention, has impacted positively on the naira stability.
Today, with key policy initiatives, especially the introduction of the Investors’ & Exporters’ Forex Window, the apex bank has brought convergence in the market, keeping the naira stable at N361 to the dollar in the parallel market. The apex bank has also continually intervened in the forex market at the retail end, supplying both dollar and yuan to meet forex demands.
The total foreign exchange (forex) interventions by the Central Bank of Nigeria (CBN) stood at $963 million as at August 2018. According to a report by Financial Derivatives, a financial market research firm, the forex interventions have helped to stabilise the naira against global currencies, especially the dollar.
At the parallel market, the naira started the period at N360/$, and inched up marginally, closing at N361/$ on August 28.
This can be attributed partly to the CBN’s intervention of approximately $963 million in the period. The naira also appreciated against the pound and euro to close at N464/£ and N412/Euro on August 28, from N474/£ and N415/Euro on August 13.
At the interbank foreign exchange market, the naira started the period at N306.05/$, and depreciated marginally by 0.033 per cent to close at N306.15/$ on August 28.
The naira depreciated by 0.050 per cent to close at N362.38/$ at the IEFX window from N362.20/$ on August 13. Total forex traded at the IEFX window was $2.93 billion, compared to $1.73 billion in the corresponding period in July.
I&E Forex Window
In the first two weeks of introducing I&E Foreign Exchange Window, forex speculators lost over N500 million, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over N1 billion in the first two months after more foreigners began to use the window, and its impact on the forex market deepened.
The economy has also enjoyed major inflow of forex in recent months with over $51 billion recorded in the I&E FX Window. The I&E Forex window, also called willing-buyer willing-seller window, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.
As it stands now, many forex users will have no problem accessing forex for his holidays trips given the level of stability and liquidity existing in the foreign exchange market.
The coming of I&E Forex window was followed by continuous interventions by the CBN which enabled banks and bureau de change (BDC) operators to meet forex demand at the retail end of the market. The naira now exchanges at N362 to dollar at both the BDC and parallel market rates while the official rate for the local currency stood at N305.6 to dollar.
Aside establishing the I&E Forex window, the CBN also opened a special forex window for Small and Medium Enterprises (SMEs). The window, which allocates $20,000 per business per quarter, helps the SMEs import “eligible finished and semi-finished items” needed for their businesses. The CBN said the bank’s special intervention was necessitated by its findings that many SMEs were being crowded out of the forex space by large firms.
Dollar/yuan interventions
The CBN has injected $340 million into the interbank retail Secondary Market Intervention Sales (SMIS). This is in addition to the sale of 69 million Chinese Yuan (CNY) in the spot and short tenored forwards.
The figures obtained from the CBN showed that the United States (US) dollar denominated interventions were only for concerns in the agricultural and raw materials sectors.
According to its Acting Director, Corporate Communications, Isaac Okorafor, the sales in Chinese Yuan were through a combination of spot and 15-day tenors. He said the exercise, in line with its guidelines, was for the payment of Renminbi denominated Letters of Credit for agriculture as well as raw materials and machinery.
Okorafor also explained that the requests attended to were bids received from authorised dealers, adding that Renminbi’s availability was sure to ease pressure on the foreign exchange market.
He attributed the relative stability in the foreign exchange market hugely to the continued intervention of the CBN as well as the sustained increase in crude oil prices in the international market.
The CBN spokesman further assured that the CBN would remain committed to ensuring that all the sectors continue to enjoy access to the foreign exchange required for the business concerns, whether in US dollars or Chinese yuan.
It will be recalled that the CBN on Friday, July 20, announced the commencement of its intervention in the sale of foreign exchange in Chinese Yuan (CNY), marking the concrete commencement of the Bilateral Currency Swap Agreement (BCSA) signed with the People’s Bank of China (PBoC) on April 27, 2018.
The statement announcing the flag-off of the sale had explained that there would be no predetermined spread on the sale of FX Forwards by authorised dealers to end-users under the Special SMIS-Retail, adding that authorised dealers would be allowed to earn 50 kobo on the customers’ bids.
Apex bank seeks lifestyle changes
CBN Governor Godwin Emefiele has called for a change of lifestyles among Nigerians to sustain naira’s recovery against the dollar. He said in a campaign shared by Okorafor: “The size of Nigeria’s reserves and the value of the naira critically depend on our lifestyles and on the value and types of imports we allow into the country.”
Emefiele’s message implied that a change in consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency.
Analysts said the CBN’s assurance to stakeholders that it will continue to intervene in the forex market, a promise it has kept for more than seven months stabilised the market.
But stability is bad news for forex speculators. They prefer volatility which makes them to declare more profits.
Head, Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the forex market has lost its drive for profitability and is no longer exciting for players. He said the boom time for forex dealers was over after the CBN kept its dollar intervention promises. “In terms of forex business, it is not as exciting as it used to be. What makes the market exciting is volatility. The operators are not always happy when market becomes stable, because their profit margin drops. The profit-taking opportunity in the market is very lean at present and so are the turnover and spread,” he said.
He said Nigeria’s currency crisis was triggered by a dip in crude oil prices, which adversely affected foreign reserves and created chronic dollar shortages. It was the need to curb dollar shortages and stabilise naira against world currencies that prompted the CBN to regularly inject dollars into the market to narrow the gap between official and black market rates. This measure has not only led to convergence between parallel and black market rates, but has chased currency speculators out of the market.
While the banks have continued to get dollar supplies to meet the demand of genuine forex users, the black market operators whose cost of operation has remained the lowest in the value chain, have also stayed put in the business.
“The black market operators do not need licence to operate, neither do they demand for documentation from forex buyers. They are simply doing cash and carry business and have largely benefited from the rate convergence although their profit margin has also dropped,” a Lagos-based BDC operator, Isah Yakubu, said.
He said black market forex has been in operation for over 100 years, adding that patronage for this market has continued at all times, not-withstanding the state of the economy and forex market.
For the currency speculators, who buy dollar for keep, and sell when it strengthens, the forex business has been a nightmare after the CBN sustained its interventions. After recording huge losses in naira and foreign currencies, these speculators seem to have been chased out of the country’s forex market.
Afrinvest West Africa Limited Managing Director Ike Chioke said the jump in foreign inflows was not a surprise given the development in the forex market, particularly the launch of the I&E forex window in April.
“The knock-on effects of strong portfolio flows are already evident in performance of the domestic equities market which has historically been driven by foreign portfolio investors,” he said. Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.
Forex restriction on 41 items
The CBN’s restriction of 41 items from accessing forex from official windows was one of such policies that has also boosted forex stability. More than two years after the policy shift, its objectives such as encouraging local production of the affected items and boosting local industries suffocated by the importation of competing products are being realised.
The policy implementation was part of the home-grown solutions introduced by Emefiele to sustain forex market stability and ensure the efficient utilisation of available forex to grow critical segments of the economy.
The policy implies that those who import these items can no longer buy foreign currency from the official window to pay overseas’ suppliers. Rather, they will have to source forex from the parallel market or BDCs to pay for their imports.
The CBN boss said the bank has been developing home-grown policies to surmount challenges that confronted the economy in recent times.
For instance, over the last 10 years, the CBN had invested over N2 trillion in funding agriculture, Small and Medium Enterprises (SMEs) and other manufacturers in the value-chain.
The regulator said the apex bank would continue to support operators in the agriculture, SMEs and manufacturing enterprises through its development finance initiatives, with a view to complementing the Federal Government’s efforts at diversifying the economy and ensuring that the nation is self-sufficient in food production.
Speaking on the 41 items, Emefiele said: “The issue of those 41 items, unfortunately, is one that has been on my table. But I think it is important that in the life of an economy, there is a need for us to take a look and ask ourselves: what really are we importing into this country? “When this thing started, we said: Why should we import rice? Why should we import toothpick? Why should we import palm oil? At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.
“So, there is the need for us to say at this time when there is a scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”
The CBN boss’ logic is that when items, such as palm oil, are imported, the local producers are made poorer. “When we import rice, we impoverish the rice producers in Abakaliki, Kebbi, Sokoto, Katsina and other parts of the country. We need to look at that very seriously because God has blessed this country, with good climate, good weather, which should be taken advantage of. Since we can produce these things, let’s use them to feed our people so that we can save foreign exchange for the country,” he said
Emefiele said he was satisfied with the outcome of the policy, adding that more time was needed to evaluate its success. The CBN governor said the policy could be reviewed when it was concluded that local manufacturers of the restricted items had become very competitive. Emefiele clarified further: “My view would be that if you have forex, you should devote it for the import of items that are important and can’t be produced in the country. “If you have excess forex, save it or create reserves. My view, which is the view of government, is that there are certain items that we can produce locally.
Measures to strengthen naira
Some of the measures put in place by the CBN to end the naira crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.
The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the Nigerian financial markets
The naira-Settled OTC Forex Futures are non-deliverable forwards, or a contract where parties agree to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date.
On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.
FMDQ’s Managing Director/Chief Executive Officer Bola Onadele Koko said: “The naira-settled OTC Forex Futures product is a major milestone development in the evolution of the financial markets. The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape.
“This innovation offers opportunities for government, businesses, pension fund administrators, investors and individuals among others to hedge (not speculate) to cope with exchange rate risk.
“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.”
Stakeholders proffer solution
Chioke believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy. To him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves. “To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.
Ezun said: “There is a limit to how far a policy can support naira. Demand for dollar is huge because the economy is import dependent. A lot of industries still depend on importation of raw materials and finished goods making our import bills to go up.”
Association of Bureaux De Change Operators of Nigeria President, Aminu Gwadabe said the country has not been able to build strong buffers, so that when crisis of this nature occurs, as seen in other countries, the economy would be protected. He said: “The United Arab Emirates has over $400 billion in their reserves and that is a very big buffer for them as it protects their local currency at any given time and that is what I would want to see in Nigeria. Don’t forget that without the buffers, there is no way one can defend the local currency.”
He said: “As a Nigerian, anytime I see the gap increasing, I’m worried and I say that this gap has to be reduced. The rising gap between both markets is fueled by compromise. Nigeria is an economy where you see compromise. Speculators are the biggest challenge facing the naira.
“Don’t forget that speculation is on its own a business. Once the CBN follows one road, they will find a way to frustrate the policy and ensure the survival of their business. But with increased transparency and liquidity, the activities of speculators will be reduced and volume of parallel market operators will also be reduced. We should move from the era of dollar allocation to think of how to bring in the dollars”.
The economy has expanded by an average of 1.73 per cent year-to-date. Whilst Nigeria’s GDP growth rate has remained positive for five consecutive quarters since its exit from the recession in second quarter of last year, it remains below its population growth rate of 2.7 per cent. The decline in quarter-on-quarter growth is also reflective of a much needed boost to the real sector.
The introduction of initiatives such as the Differentiated Cash Reserve Requirement and the Corporate Bonds Funding Programme targeted at improving credit to employment elastic sectors including agriculture and manufacturing sectors is a welcome development. This would increase borrowing in these sectors, improve activities and boost economic growth. However, the slowdown in growth rate in second quarter Q2’18 would be a key consideration for the MPC at its next meeting on September 24/25.
