And the beat goes on – impact of the latest CBN fx policy

When the Central Bank of Nigeria (CBN) released a new set of FX guidelines on 20^th February, many market players took the apex bank’s promise to increase Foreign Exchange availability in the Nigerian Foreign Exchange market with a pinch of salt. The main concern for many was “sustainability”. In other words, would CBN be able to sustain FX supply and keep rates low as long as necessary for the country to leapfrog out of its current recession. Recall that one of the main factors responsible for plunging the nation’s economy into negative growth was FX scarcity as the nation’s real sector depends largely on importation of raw materials.

Looking retrospectively over the last 2 months, one must give kudos to the apex bank for its actions and achievements. Since 21^st February, the CBN has offered and sold well over $2.5bn to the FX market through various windows as follows:

• Direct intervention to the Inter-Bank FX Market ($1.5m per bank per trade)
• Secondary Market Intervention Sales (SMIS) – Retail and Wholesale (Weekly offers of circa $100million totalling up to $750million per month)
• Direct sale to Small and Medium Enterprises (SMEs) – On 10^th April, the CBN announced commencement of quarterly sales of $20,000 to SMEs for eligible imports with full shipping documentation due no later than 60 days from Form Q date. (Form Q is the new CBN form designed specifically for the SME sector in order to ease the obstacles encountered by the SMEs in accessing the Foreign Exchange market.
• Weekly sales to Bureaux de Change ($10,000 per BDC per week, now increased to $40,000 per BDC per week)

Specific sectors that have largely benefitted from these sales include Airlines, Agriculture, Petroleum and raw materials/machineries sub sectors. Individuals no longer need to hustle for Personal or Business Travel Allowances as well as overseas school fees remittances for their wards. These can now be easily accessed via any commercial Bank in Nigeria at rates far more attractive than parallel market levels.

The CBN action triggered an initial massive appreciation of the naira at the parallel market to N375/$ before renewed buying for items on the 41-item prohibited list saw the naira shed some of its gains back towards N390/$. Recall that experts had predicted levels circa N380 – N450 as a fair value for the naira in the near to medium term.

Furthermore, on the back of CBN’s recent action, panic buying has largely subsided as FX end-users in the key sectors of the economy now have reasonable reassurance of the apex bank’s determination to continue to meet all legitimate FX demand while striving to achieve exchange rate stability in the market.

 

Economic activities have picked up albeit gradually as new Letters of Credit are being opened by Nigerian banks subject to 10% of amount of FX purchased via the SMIS window. Based on this, it is expected that Nigerian port activities will pick up over the next 3 to 6 months as new orders for raw materials and other eligible import items begin to hit Nigerian shores. Factories are expected to resume operating at optimal levels as they begin to receive raw material input into their production lines.

Meanwhile, a series of factors which can be traced to the Treasury Single Account (TSA) policy, economic downturn, naira devaluation and high incidence of Non-performing loans (NPLs) have put pressure on bank’s liquidity. Thus many banks had leveraged on the non sale of FX by the CBN to play with clients’ idle funds. Many had gone ahead to invest these funds in medium securities specifically Nigerian Treasury Bills and CBN OMO Bills. Now with the persistent sale of dollars by the CBN, banks need to fund their current accounts with CBN with the equivalent of FX bought. This has triggered a liquidity squeeze in the system which saw inter-bank overnight and OBB rates spike as high as 200% p.a. Furthermore, the CBN has prevented banks from accessing its Standing Lending Facility (SLF) and Intra-day Lending Facility (ILF) windows for the purpose of funding their customers’ FX bids. For example, from the first offer of $500m by the CBN in February, banks were only able to take up $370.81m due to inability to fund the balance. In an apparent well thought-out strategy, whilst the apex bank has continued to offer FX to banks, it has also continued to offer OMO bills about twice weekly at yields above 18% for tenors circa 180 days in a bid to mop up liquidity in the system. Over the last couple of weeks, we have seen total subscription at less than 3% of total amount on offer across the 177 to 331-day tenor buckets. If nothing, this is clear evidence that banks are running low on investible funds. Survival strategy will therefore include the following:

• Short term takings from the inter-bank market
• Aggressive deposit mobilisation via advert campaigns as we are seeing via media
• Rediscounting of Treasury bills
• Corporate bond (Eurobond) issuance, reissuance or extension
• Accessing the CBN SLF/ILF windows (not applicable for FX funding) at MPR + 200basis points i.e. 16%

Sequel to the foregoing, it is expected that system liquidity tightness will gradually improve as nearer dated treasury bills and bonds begin to mature and other public sector related cyclical payments (e.g. state allocations from FAAC, cash calls from JVs) once again begin to hit the system.

 

CBN has been faced with a stiff challenge over the last 18 months: rising inflation, exchange rate instability, currency depreciation and negative growth all of which form the distasteful ingredients for stagflation. Whilst the bank has scored low on policy stability and has been accused of lack of professionalism in some instances, the bank on the other hand has apparently been able to effectively deploy the conventional tools at its disposal (NTBs/OMO Bills) to mop up excess system liquidity (albeit at a high cost) which should gradually bring inflation back to tolerable levels in the medium term. Last data published shows inflation has moderated to 17.26% after peaking at 18.72% in January. Furthermore, persistent sale of OMO bills at mouth-watering yields as high as 22% has to a certain extent attracted Foreign Portfolio investments which have marginally contributed to the supply side of the FX market. The introduction of the bespoke Non-Deliverable Futures with mouth-watering backwardation pricing also helped to a large extent in calming the FX market as FX end-users are able to hedge future FX pricing despite low liquidity levels in the FX Market. Now with the new FX Policy, the apex bank has been able to trigger naira appreciation by flooding the FX market with dollars.

 

Last week, the CBN released yet another modification to its guidelines, establishing a Window for Investors and Exporters. This window is expected to further reassure potential investors on the liquidity of the FX market so they no longer have cause to worry about how to exit the market at the end of their investment cycle. Also, the CBN will allow the market determine the naira’s rate via this Window with minimal intervention as rates will now be as agreed between willing buyers and willing sellers. Whilst early observers are of the opinion that this will initially lead to renewed naira depreciation, it must be noted that ultimate demand and supply will determine how this will play out. Although this development has not addressed the price fragmentation apparent in Nigeria’s FX market in line with global best practice, it must still be seen as a big step in the right direction. Until the market attains a level of sustained surplus liquidity, one cannot expect a complete harmonization of rates and restoration of inter-bank trading. Overall, these developments should help foreign investors as well as local businesses in all major sectors to plan future cash-flows, reduce cost of operations and effectively begin to perform at optimal levels in the coming months. Ultimately, a combination of these actions, coupled with the Federal Government’s medium term fiscal policies should see Nigeria’s ailing economy swiftly return to the path of healthy growth.

 

OLAWALE HAMED