•Naira depreciates to N910/$1 on parallel market, N770/$1 on I& E window
•NGX mulls dollar-dominated bond listings
Obinna Chima, Nume Ekeghe and Kayode Tokede
As part of efforts to guide against foreign currency (FCY) risk as well preserve the scarce liquidity in the foreign exchange (FX) market, the Central Bank of Nigeria (CBN) has directed financial institutions under its regulation to with immediate effect, stop granting FCY secured naira overdrafts.
In a letter to the Managing Director of one of the commercial banks (name withheld), dated August 17, 2023, a copy of which was obtained by THISDAY, the central bank also gave the financial institution two weeks to replace the FCY collateral on its existing overdrafts with other acceptable asset types, warning that failing to do so, the facilities should be unwound without delay.
This emerged just as volatility resumed in the FX market as the naira yesterday, depreciated to N910 to a dollar on the parallel market in Lagos, compared to the N850 to a dollar it went for on Monday.
On the other hand, on the official Investors and Exporters’ (I&E) FX window, the naira closed lower at N770/$1, as against the N761 to a dollar it closed on Monday. Total volume of transactions on the I & E window yesterday was $64.93 million.
Also, yesterday, the Nigerian Exchange Limited (NGX), disclosed that it was proposing listing dollar-dominated bonds with the aim of easing difficulty in accessing FX,
Continuing, the central bank stressed that the practice of granting FCY secured naira overdrafts was not only fraught with the risk of currency mismatch, but was also capable of limiting FX liquidity in the market, thereby creating scarcity and exerting pressure on the exchange rate.
The letter signed by the Director, of Banking Supervision, CBN, was titled: “Granting Naira Overdraft Facilities Secured by Foreign Currency Deposits.”
It stated: “Following our supervisory review on the above subject, we noted that your bank granted Naira overdraft facilities secured by FCY deposits.
“This practice is not only fraught with the risk of currency mismatch, but is capable of limiting FX liquidity in the market, thereby creating scarcity and exerting pressure on the exchange rate.
“It is also contrary to the spirit of our circular referenced BSD/DIR/GEN/LAB/08/013 dated 17th April, 2015, and titled “Currency Substitution and Dollarisation of the Nigerian Economy.”
“Consequently, your bank is hereby directed to cease granting FCY secured naira overdrafts forthwith and immediately replace the FCY collateral on existing overdrafts with other acceptable asset types within two weeks, failing which the facilities should be unwound without delay.
“Evidence of compliance with this directive should reach the Director, Banking Supervision Department, CB not later than September 7, 2023. Please be guided accordingly.”
The CBN has been battling to shore up FX liquidity in the country following the unification of FX rates.
In line with this, the Nigerian National Petroleum Company Limited (NNPC) recently secured a $3 billion emergency loan from the African Export-Import Bank.
Naira Depreciates to N910/$1 on Parallel Market
Meanwhile, the naira depreciated yesterday, to N910 to a dollar on the parallel market and N770 to a dollar on the I & E FX window.
With this depreciation at both the official I&E window and parallel markets, the gap between both rates has widened to N140 to a dollar.
Speaking in a telephone chat with THISDAY, the President, Association of Bureau De Change Operators of Nigeria (ABCON), Mr. Aminu Gwadabe, alleged that the fintechs and some other unlicensed mobile money operators were contributing to the pressure in the FX market.
“The fintechs and unlicensed firms are contributing to pressure in the market. These fintechs are now operating across different jurisdictions and different legislatures. Imagine Binance has millions of Nigerians on its platform, how is Nigeria benefiting from that?” he wondered.
According to the currency dealer, about 50 per cent of remittances do not come in through the official FX market, which he argues adds to the scarcity in the market.
“The truth of the matter is that a lot of people use their platforms, some of them even use US dollar platforms, with no track record so they can know what is happening.
“We are only seeing 50 per cent of diaspora remittances come in, and the other 50 per cent is not coming.
“Most of the funds are left abroad, and some of the IMTOs and fintechs have admitted that. So, part of that is also adding to the pressure to the market,” he added.
On his part, the Chief Executive Officer, Sonora Capital, who is also a BDC operator, Kunle Alonge said: “The major problem of the market is the scarcity of dollars. Anything that will provide liquidity, anything that will stimulate liquidity would actually be better for the market. The only reason why the rate is going up endlessly is because there is scarcity of dollars and there is a lot of demand out there. Part of the speculative demand but it is also part of normal human behavior.”
NGX Mulls Dollar-Dominated Bonds Listings
In the meantime, the NGX yesterday said it was proposing listing dollar-dominated bonds with the aim of easing their difficulty in accessing foreign exchange.
Speaking with Bloomberg, the Chief Executive Officer, NGX, Mr. Temi Popoola stated that the initiative was targeted at companies operating from the country’s special economic free trade zones and those earning foreign currency.
Popoola had said the Exchange plans to work with the federal government on the introduction of fiscal category incentives as well as advocacy for listed companies on their challenges.
He attributed the staggering growth of the Nigerian capital market recently to increased focus, emphasis on regulation and the return of investors’ confidence in the market due to the policies implemented by President Bola Tinubu.
He further explained that the ability to raise capital for smaller corporates would drive the growth of the nation’s economy, while adding that to unlock capital, there is a need to tap into retail investment.
According to Popoola, NGX was strategically working with the government on attracting more listings to its platform among other objectives.
“It is very clear that the government needs as much support as it can get. So, we are working with all stakeholders: the SEC, other exchanges, just across the market to address key challenges around wealth creation and revenue generation.
“Currently, we are working through a plan tagged ‘fiscal-type incentives for listed corporates’ as Nigeria is one of the few geographies where a listed company can barely point at any tangible fiscal thing that they enjoy by being listed.
“We will also be engaging corporates to further identify their pain-points and amplify that with the government,” he added.