Lever for the Naira



Nigeria’s beleaguered naira enjoyed a period of relative calm last week, following new foreign exchange (FX) measures that were introduced by the Central Bank of Nigeria (CBN).
The actions which clearly caught currency speculators and traffickers off the guard, has resulted in a significant appreciation in the value of the naira against the US dollar.
Specifically, the naira which fell to as low as N525/$ the preceding Friday, strengthened remarkably by N75 in just one week, to close at N450/$ on Friday. With the improved FX liquidity, there are also predictions that the naira may climb to N400 to a dollar in the coming days.

Prior to the currency move by the CBN, volatility was a recurring theme in the Nigerian FX market, particularly at the parallel segment, since the oil market downturn, which began in 2014. The naira consequently shed 46.5 per cent and 66 per cent in the interbank and parallel markets respectively between June 2014 and January 2017.
But the CBN in the new policy actions in the FX market released last Monday, among other things, resolved to ease the burden of travellers and ensure that transactions are settled at much more competitive exchange rates and had directed all banks to open FX retail outlets at major airports as soon as logistics permit. Furthermore, as part of efforts to further increase the availability of FX to all end-users, the CBN said it decided to significantly reduce the tenor of its forward sales from the current maximum cycle of 180 days, to no more than 60 days from the date of transaction.
Sequel to its promise to ease the difficulties encountered by Nigerians in obtaining funds for FX transactions, the central bank, during the week carried out wholesale interventions in the interbank FX market by flooding the market with dollars to meet the visible and invisible requests of customers.

The acting Director, Corporate Communications Department, CBN, Mr. Isaac Okorafor expressed optimism that the intervention of the CBN would substantially ease the FX pressure on visible and invisible needs of customers. Okorafor said that the Bank would continue to make interventions based on qualified bids from the banks on the requests of their customers.
Also, global rating agency, Fitch Ratings expressed optimism that the measures announced by the CBN may ease some of the severe foreign currency liquidity pressure faced by banks in the country. Fitch noted that the most important aspect of the CBN’s announcement was the plan to normalise the FX interbank market. The agency explained that the intention of the CBN was to clear the backlog of overdue foreign currency obligations owed by banks to international creditors.
It explained: “These are primarily trade finance obligations owed to correspondent banks. In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy.”
Bridging the FX Market Gap
The Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, held the view that the new measures announced by the CBN would help address the  misalignment between the official and parallel market rate.
According to the former university vice chancellor, “they (CBN) figured out that part of the problem was access to FX. So, if the banks open retail offices at the airports, it would facilitate access to a lot of people and it may become more transparent.  The misalignment in the currency is causing a lot of distortions in the economy.
He stated that an improvement in the level of FX supply in the country would help dampen the effect of rising rate of inflation in the country.
Ekpo, however explained: “But we must all understand that Nigeria has an FX supply problem. It is not really a CBN problem. We get FX majorly by selling crude oil. So, we need to change the structure of our economy so that we can have other sources of earning FX. If we have a viable manufacturing sector that exports most of its products, we would have enough FX. That is why I said we should blame the CBN all the time. So, this is a step in the right direction and we expect government institutions such as the Ministry of Trade and Investment to carry out their own reform so as to support what the CBN has done.”
Also, the Chief Executive Officer, BIC Consultancy Services, Dr. Boniface Chizea, expressed optimism that the CBN would be able close the wide gap between the parallel and interbank FX markets “if and only if we meet all the demands for foreign exchange at the official window.”

He added: “Once demand is sought outside this window it must be at a premium, even if it is from the Bureau De Change.  The move to make dollars available to the banks to sell to those who demand for BTA, school fees and medicals at a rate lower than the parallel market rate which has begun to dangerously tend southward is a master stroke as this move should reduce the demand pressure at the parallel market resulting in an appreciation which could catch some economic agents who have taken positions expecting the exchange rate to depreciate further to take a hit and this should send a strong message to all speculators that if they are not careful they could get their fingers burnt.”
Chizea, pointed out that the reduction of the wide gap between the official interbank window and the parallel market rate was the major reason for the recent changes to the approach to the determination of the exchange rates.
“And if the recent steps did not breach the gap between the official and parallel market we must then consider this experiment a grand failure. But really it is logical that if you remove a large junk of demand from the parallel market as the recent measures are bound to guarantee that the rates would inevitably appreciate.
“One thing you could say about the parallel market rates is that the rates are very responsive to the movement in demand and supply situations. One thing which the monetary authorities must guard against to ensure success is diversion and no round tripping must be countenanced in this respect. Otherwise the full benefits of the recent measures would not be realised,” Chizea added.

On his part, the CEO, Global Analytics Consulting Limited, Mr. Tope Fasua, faulted criticism of what some had described as the frequent changes to the country’s FX rules, saying that “the role of a central bank is to tinker with policies.”
He commended the central bank for what he termed as its dynamism, saying: “Nobody has a singular policy and then goes to sleep. This economy is not a developed economy. Even the developed economies, they tinker with monetary policies. But I think Nigerians should put themselves in the shoes of these policy makers. I am not saying that they get it all the time. A good central bank must be dynamic and that is what we have been seeing.
“You can’t leave FX supply in the hands of BDCs. What they have just done by allowing the banks to open retail outlets in airports is the best because they (CBN) would be dealing with banks that they can control.  No matter what some people feel about the central bank, I personally think they are on the right track. If we look at the accretion to the external reserves, you will see that some of their policies are actually having effects. When people need little amount of FX for school fees and PTA, they should be able to get it without hassle and that is what the CBN has done.”
Stimulus for the Interbank FX Market
Analysts at Cowry Assets Management Limited, held the view that the move by CBN to increase forex availability to end users was against the backdrop of the recent buildup in Nigeria’s foreign exchange reserves amid increased crude oil revenues.
“Given improvement in the external sector, we anticipate that the new measures could pave the way for a gradual return of confidence in the foreign exchange market. We also expect the monetary authority to do more to harmonise the exchange rates and thereby discourage arbitraging,” they added.
In the same vein, analysts at Ecobank Nigeria, noted that the new policy actions would also help reinvigorate the hitherto illiquid interbank FX market. According to Ecobank, the decision to cap the settled rate for the retail transaction at 20 per cent above the interbank market rate and the restriction of school fees to university education only could be a subtle way to partly control banks’ charges and manage likely FX demand pressure in the market.
They added: “Over all, the impact of the circular could be short-lived, if the CBN does not show strong capacity to support the FX market with liquidity.”

Also, Cyprus-based FXTM Research Analyst, Lukman Otunuga noted that with dollar demand for school fee payments overseas and personal travel allowance enforcing downside pressures on the parallel market, the move by the CBN to sell Dollars to retail users via commercial lenders was logical.
But the Financial Derivatives Company Limited stated in a noted yesterday that: “Before we get carried away, we must remember that this recovery is only as good as the supply remaining consistent. The good news is that oil is currently trading at $57pb. If sustained, this will provide the buffer needed to support the CBN’s policy directive of substantial weekly dollar injections into the market.”
On their part, Afrinvest West Africa Limited analysts said they “do not believe this move can sustainably address the lingering FX liquidity challenges in the economy without relaxing FX rate peg and review of list of items ineligible for FX transactions in the parallel market.”

They added: “Personal and Business travel allowances, school fees and medical fees have been estimated to account for less than 20 per cent  of total FX demand in the country hence there is still a large volume of demand (particularly the 41 ineligible items) that could pressure rate at the parallel market.
“It is hard to make an exact call on direction of rate, but it is unlikely the parallel rate will breach the N500/$1mark again in the shorter term as a more dollar liquid CBN will not shy from further interventions. Yet, our medium term conviction remains that maintaining the interbank rate at current peg (without implementing deeper reforms required) will lead to deterioration in current account as more demand surfaces.”