Banks test CBN’s resolve, as naira hits new low

Nigerian banks are increasingly doing dollar deals outside the official interbank trading platform at much lower naira (NGN) to the dollar (US$) exchange rates, undermining attempts by the Central Bank of Nigeria (CBN) to keep hold of a non-market driven exchange rate regime. This is as liquidity collapses in the interbank market due to the CBN’s tight control of that segment of the market.
The exchange rate between the Naira and the Dollar hit a record low of N376/$1 at the interbank on Tuesday Nov. 8, at the open of trade on the interbank market, before reversing losses to trade at N328.90 to the dollar, as at 3:20 pm in Lagos, on CBN interventions. Total volumes stood at $73.08 million.
This is the lowest it has reached after the currency exchanged for N365/$1 back in August 18, 2016.
A confidential document earlier seen by BusinessDay showed the CBN directed banks not to bid for dollars at a rate exceeding N315 for amounts less than $1.5 million. For amounts larger than $1.5m, the CBN requested that banks call to agree on an appropriate exchange rate.

Treasury sources tell BusinessDay that banks are beginning to flout these informal rules as they fill orders for their clients wishing to bring dollars into the country at more realistic exchange rates.
“Banks have closed some $85 million of deals in the last two weeks for foreign investors bringing in dollars at a rate closer to N400 per dollar,” one Treasury source told Business day.

These traders say Emefiele gave his nod to the deals. They disclosed that usually when there is a huge inflow, the bank attracting the inflow would request for a more realistic rate to enable them lock down trades. It is understood an investor who brought in an inflow of about US$60 million on Monday Nov. 7 was able to get approval from the CBN to bring it in at N380 to the US$. Also, an inflow of US$81million was executed at N380, on Tuesday Nov. 8, traders tell BusinessDay.

The arbitrary nature of determining the exchange rate has created confusion among banks in the interbank market. Sources say some banks apply and do not get the permission, while other banks apply and get permission to do deals at even higher rates.

The situation has now resulted in some banks accepting new inflows at a more market friendly rate closer to N400 to the US$, without seeking permission from the CBN. Other sources in the manufacturing sector also tell BusinessDay that the current tight control of the foreign exchange market has created merchants who now offer to help manufacturers get dollars from the CBN; but for a commission.
“They come to you and tell you that they know people at the CBN and ask you to apply through your bank and that they can guarantee that you will get your dollars, as far as you give them their requested commission,” the source said.
The wide spread between the official and unofficial rate of the naira has given room for sharp practices, analysts say.

The last official trade of the naira on November 8 at N328.90 per dollar represents a spread of N136.1 between the official and unofficial rate, which traded at an average of N465 per dollar on Tuesday.

Analysts say policy uncertainty is the major driver of the widening gap between the official and black market rate, as investors wait to see the next move of the CBN after peer, the Central Bank of Egypt floated its local currency on Friday, November 04, 2016 to trigger independent dollar inflows.

“Our examination of Emerging Markets (EM) devaluations suggests that portfolio investors in EM can hold back from markets facing devaluation until the adjustment is complete,” a market source, who craved anonymity said by email.

“It appears only a matter of weeks before the CBN is left with no options than to have a true float that is not subject to manipulations,” the source added.

Portfolio investors are probably anticipating a further depreciation and are simply waiting for a favourable time to get good value for their money before they deploy much higher amounts of capital to Nigeria, a trader told BusinessDay.

Portfolio investment in bonds and money market instruments attracted the highest capital inflow into Nigeria in the third quarter of 2016, according to a report released by the National Bureau of Statistics (NBS) on Monday.

Each type of investment (FDI, Portfolio and Other) recorded quarterly increases, of 84.84 percent, 172.84 percent and 7.80 percent respectively.
However investment inflows for the asset classes fell by 52.54 percent, 8.8 percent and 45.5 percent respectively on a year on year basis, the NBS data showed.

“It is expected that before more inflows come in, we need a realistic market driven foreign exchange pricing mechanism as opposed to the current market that is rigged. Egypt did it, why can’t Nigeria do it?’’ Bismarck Rewane, Managing Director/CEO of Financial Derivative Company (FDC) said by phone.