By Obinna Chima
Necessity they say is the mother of invention.
Indeed, this proverb played out in Nigeria when the country was faced with what has been described as one of its worse foreign exchange (forex) crisis, which also contributed to the economy going into a recession then.
The situation, which occurred between 2016 and the first four months of 2017, then saw the Central Bank of Nigeria (CBN) taking various measures in its bid to save the nationâ€™s currency and restore confidence in the economy.
But after various measures were unable to calm the storm in the forex market then, the Investorsâ€™ and Exportersâ€™ (I&E)Â forex window, which was created in April 2017, has proved to be the magic wand.
One year after its creation, the impact of the forex windowÂ on the market has been positive as it has attracted over $20 billion since it was set up.
The central bank had explained that thatÂ the purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.
It hadÂ listed eligible transactions under the new window to include invisible transactions such as loan repayments, loan interest payments,Â dividends/income remittances,Â capital repatriation,Â management service andÂ consultancy fees.
Also,Â on the eligible listÂ was software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions including â€˜miscellaneous paymentsâ€™ as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.
While explaining that the invisible transactions under this window excludes international airlines ticket salesâ€™ remittances, theÂ CBN addedÂ that the window coversBills of Collection and any other trade-related payment obligations, which are at the instance of the customer.
It is worthy of note thatÂ supply of forexÂ Â toÂ the windowÂ isthrough portfolio investors, exporters, authorised dealers and other parties with forexÂ to exchange to naira.
The CBNÂ isÂ a market participant at the window to promote liquidity and professional market conduct.
Taking cognisance of the slow progress made by corporates in on-boarding the FMDQ OTC Securities Exchange (FMDQ) Thomson Reuters FX Trading & Auction Systems, participants at theÂ window trade via telephone.
To provide price discovery to the market, the FMDQÂ ischarged with polling buying and selling rates and other relevant information from the major participants in the market to provide participants with the requisite price discovery, and the CBN with the indicative market depth until the market migrates to the FX Trading systems.
As part of the operational requirements of the window, exchange rates of the transactions in the windowÂ are usuallyÂ agreed between authorised dealers and their counterparties.
This forex window has contributed significantly to the significant growth recorded by Nigeriaâ€™s forex reserves.
For instance, Nigeriaâ€™s reserves which stood at $30.731 billion was the forex window was introduced, is presently at about $48 billion, while the naira has been stable at N360 to a dollar, as against the depreciation to about N520 billion the economy witnessed before the I & E window was opened.
Today, most activities now occur on I&E window, with Fitch Ratings recently acknowledging that the rate on the I&E â€œshould now be considered the relevant exchange rateâ€.
The contribution of the I & E to the accretion of the countryâ€™s reserves stems from the fact that given that the amount of inflows in that window hasexceeded many peopleâ€™s expectations and willing buyers have been unable to pick up all the supply, the CBN have bought more dollars in that segment than it has sold.
So,Â the Bankâ€™s participation in that market has been a net positive to theÂ forex reserves.
Â But not all forexÂ inflowsÂ fromthe I & EÂ window go into theforex reservesÂ as the forex market segmentÂ operates as a free â€œwilling buyer, willing sellerâ€ market, which explains why its operational exchange rateÂ ofÂ about N360/US$1 is higher than those of other segments.
Clearly, aÂ significant portion of the inflows into that market do not get to the CBN because they are bought by willing importers who operate in that market.
The CBN operates in that market as a â€œresidualâ€ participant: buying excesses and supplying shortfalls, as the case may be.
Nevertheless,Â the most significantÂ factor that contributed to the accretion of the countryâ€™s reserves is thesharp decline in the countryâ€™s import bill, as a direct result of the June 2015 CBNâ€™s policy to restrictÂ forexÂ access toÂ 41-items that can be produced locally.
Despite the initial pushbacks against theÂ policy,Â the central bankâ€™s dogged implementation of the forex restriction on those 41-items had led to a 65 per cent drop in the countryâ€™s monthly import bill, from an average of $5.5 billion to $1.9 billion, as of the first half of 2017, the CBN had disclosed, with the figure expected to have risen further at the end of 2017.
Also, the recovery of crude oil prices hasÂ Â supported the reserves accretion.
To analysts at Afrinvest Securities Limited, the dominance of foreign investorsâ€™ participation in theÂ Nigerian equity market again, â€œcame to the fore as the launch of the I & E forex window has attracted more foreign portfolio investors (FPIs) inflows into equities with positive market sentiment resulting in an increased domestic participation.â€
Also, theÂ CBN Governor,Â Â Mr. Godwin Emefiele, pointed out that the forex window was established to allow more investorsÂ come into the country.
Emefiele said: â€œWe want more people to come and invest in the economy, and that was why we introduced the Investorsâ€™ & Exportersâ€™ Window. We want a forex market that will be determined by demand and supply. It has helped in forex flow and led to the appreciation in the naira we are seeing today.â€
Also, the Deputy Governor, Economic Policy, CBN,Â Dr. Joseph Nnanna, described the I & E window as â€œa mighty successâ€, saying it has â€œperformed beyond our expectationsâ€.
â€œIt is a huge success and I believe other countries can copy that from us,â€ he said.
Acknowledging the vital contribution the I & E window had made to the Nigerian economy, promoters of theÂ MSCI Emerging Markets index last year announcedÂ theirÂ decision to retain the MSCI Nigeria Indexes on its MSCI Frontier Markets Indexes, after an initial threat to delist Nigeria, citing theÂ positiveperformance of the I & E window as the major reason forÂ theÂ decision.
On his part, the chief executive, Financial Derivatives Company Limited, Mr. BismarkÂ Rewane, noted thatÂ the creation of the window was a good move on the part of the CBN as it will lead closer to the emergence of a Real Effective Exchange Rate (REER) for the country.
He said: â€œAny measure that increases the supply of forex and the number of suppliers will help to reduce the dominance of the CBN as the major supplier of forex in the market and move us closer to the emergence of a Real Effective Exchange Rate. This will attract more investors and lead us closer to a perfect market.â€
To theÂ Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investorsâ€™ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.
However, analysts have stressed the need for the federal government to address thecountryâ€™s high import dependenceÂ whichÂ explains why the exchange rate is often the bellwether for Nigeriaâ€™s economic health, and why there is a swift pass-through of exchange rate movements to inflation.Â Today, about a third of Nigeriaâ€™s forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money merely for transfer payments. Also, the countryâ€™s infrastructure deficit explains the huge level of importation of processed and final goods.
All these need to be addressed to ensure that the countryâ€™s exchange rate remains stable as well as to achieve a sustainable economic growth.