Investor confidence dealt another blow by CBN

The most recent policy moves by the Central Bank of Nigeria (CBN) are seen to be getting even more confusing and complicated, with the apex bank deploying shocking and seemingly desperate measures in its bid to forcefully ‘peg’ the exchange rate of the Naira to the US Dollar. The CBN has no circular on pegging of the exchange rate.

By organising security operatives to monitor Bureau De Change (BDC) operators, following the CBN’s mandate to this group of FX traders to buy US dollars at a maximum of US$/N390.00 and sell at a maximum of US$/N399.00, the CBN again lends no credence to the supposed floating exchange rate regime which it re-launched a little over four months ago.

With the forces of demand and supply at play, this move would only lead to increased illiquidity in the BDC market, as supply of the greenback in the BDC market will tighten. The parallel market will likely take a life of its own, as it cannot be controlled by the CBN.

Consequently, the BDC market which in the last month or so, unified with the parallel market and readily provided a somewhat credible view of the US$/Nrate, is now being threatened to join the other sub-sets of the FX market which paint unrealistic pictures of the level of the Naira. Transactions may grind to a halt as BDC operators are neither willing to effect transactions at what many consider to be unreasonable rates, nor are they willing to risk getting arrested by the security forces, should they transact at levels away from those prescribed by the CBN.

Accordingly, and as expected per the enforcement by CBN, rates fell in the BDC market from US$/N469.00 recorded last week to US$/N399.00 at the close of business Nov. 11, 2016. But for the opaque nature of this market, it would be of immense value to know the actual volumes traded. It is indeed surprising that the CBN is investing resources in the BDC market instead of the inter-bank FX market.

As a result, the spread between the BDC and the inter-bank market shrank by about 41.53% to close at US$/N94.25 from US$/N161.19 recorded the previous week. The parallel market is expected to remain at the US$/N470.00 level having opened the week at US$/N350.22 at the inter-bank market, and given the prevailing market conditions, the naira was also seen to gain, albeit artificially, during the week-ending Nov. 11, 2016 to close at US$/N304.75 against US$/N328.90 recorded for the previous week.

Trading activity in the Spot FX market between the banks and their clients for the week-ending Nov. 4, 2016 stood at US$504.54mm (average daily turnover of US$100.91mm), representing a 5.42% increase from the US$478.59mm (average daily turnover of US$95.72mm) recorded in the previous week.

Turnover in the Spot FX market amongst banks for the same trading week revealed a 45.56% decline, as a total turnover of US$38.65mm (average daily turnover of US$7.73mm) was recorded against the US$71.00mm reported for the previous week ended Oct. 28, 2016.

In what can be classified as an eventful week, the CBN also fined Standard Chartered Bank Nigeria Limited, N2.00bn for buying US$25.00mm at the inter-bank rate and selling same at a rate above what the apex bank considers ‘ideal’.
Considering the “strictly interventionist” role the CBN claimed it would play in FX market, and going by the laws stipulated in the Foreign Exchange Monitoring and Miscellaneous Provisions Act 2004 – FEMM Act 2004, the question on most market watchers’ minds rings thus – Was this move justified?

As every market participant, especially investors, struggle to find the true and fair level of the naira in the unarguably chaotic Nigerian FX market, the reoccurring questions remain – how far will the CBN go in its bid to ‘force’ what it deems a‘fair’ rate for the naira? How realistic and sustainable are these measures, in view of the objective sought, particularly when investor confidence is persistently being trampled upon?

The inter-bank market, which remains extremely illiquid, was beginning to show signs of a liberalised market as traders ignored the CBN’s advised pegged levels of US$/N305.00 and $/N315.00. In order to satisfy their clients’ growing backlog of demand for foreign currency, the banks started buying from willing clients and selling to willing end-users. Analysts do not understand why the CBN singled out Standard Chartered Bank Nigeria Limited of all the banks that transacted above US$/N315.00

The unpopular action by the CBN was not based on any documented directive on the exchange rate at which market participants should execute trades. In any case, such a directive would have been a contravention of the FEMM Act 2004. It appears the CBN would rather have banks engage in unethical conduct and be part of the sham in creating the wrong impression that the exchange rate is stable at US$/N305.00.

However, nothing is far from truth as the badly managed inter-bank market has a consistently growing unmet demand which continues to destroy the economy and potentially command an exchange rate nearer US$/N400.00 than US$/N300.00. The exchange rate range at which sellers are willing to sell US dollars has again gone up to US$/N380.00 – US$/N400.00. The CBN’s actions have been responsible for the extremely low liquidity and unnecessarily high exchange rate.

What market operators consider most regrettable is the seeming reversal of the many months and even years of hard work invested by subject-matter/financial market experts in their varied attempts at instituting the requisite market structure into the Nigerian financial market system that will make for a vibrant economy. From the exclusion of the nation’s bonds from reputable international bond indices, the rapid loss of foreign portfolio and direct investments, intense currency depreciation to soaring inflation, to mention a few, the Nigerian financial market, and the economy, are in desperate need of a renaissance.