• Tuesday, July 23, 2024
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CBN sells most dollars in one month as liquidity fades

…$575m sold in May exceeds March & April combined

…Oil companies to resume dollar sales to banks

The Central Bank of Nigeria (CBN) recorded its highest dollar sales in a single month in 2024, intervening in the foreign exchange market to boost supply.

Some $575 million was offloaded by the apex bank in May to make up for thinner foreign investment inflows, according to data obtained from FMDQ Securities Exchange.

That’s more dollars sold than in the previous two months combined. The CBN had sold $151 million in April and $189 million in March, which gives a total of $340 million.

In February, the CBN sold $392 million to banks after it resumed dollar sales following a five-month break.

The CBN’s intervention in May, though exceeding previous months, accounted for only 6.6 percent of the $5.89 billion market turnover for the month of May (excluding the 31st).

Liquidity in Nigeria’s foreign exchange market has dipped as the instability in the exchange rate and unrelenting inflation rate spooks foreign investors.

The turnover for the first 30 days of May is a 35 percent decline from the $9.12 billion traded in April and a 53 percent decline compared to March turnover of $12.6 billion, according to FMDQ data.

“The CBN had to intervene in the market last week to prop the naira, given that dollar liquidity has been low,” a source familiar with the matter said.

“It had over $1 billion in Non-Deliverable Forwards and the lower exchange rate that happened after the CBN sold dollars equated to a lower payout for the bank (CBN),” the source said.

The Abuja-based bank sold dollars on three occasions last week with the single-day high in 2024 coming on Wednesday May 29, when it sold $141 million.

In the days leading up to that, the CBN sold $98 million and $126 million on Monday and Tuesday respectively.

That makes a total of $365 million in three days and takes the total interventions, which on its own beats the total sales in the full months of March and April.

Another well-informed source told BusinessDay that the CBN also sold dollars in a bid to mop some naira liquidity.

“The CBN had futures maturities that meant liquidity injection of up to N1 trillion and with a tightening stance, they had just two means to mop up that liquidity- sell foreign exchange or sell OMO (Open Market Operations)- and they chose both,” the source said.

“The consequence of selling FX is an appreciation and because there has been dollar liquidity issues and the rates have been rising in recent weeks, selling dollars into a liquidity starved market is what the CBN should have done in any case. It just happens to double as a naira liquidity extraction mechanism,” the source said.

The CBN’s busiest week in terms of dollar sales in nearly a year didn’t have a lasting impact on the naira.

After initially jumping to a one-month high of N1173 per USD on Tuesday, the naira would end the week in worse shape than it began, closing at N1485.99 on Friday, May 31 compared to N1482.81 on Friday, May 24.

The currency is expected to stabilise at between N1350 to N1450 in the next 12 months, according to Bismarck Rewane, chief executive officer of Lagos-based consulting firm, Financial Derivatives Company.

Foreign investors have grown cold feet towards Nigeria following the naira instability.

Tellimer Ltd. data shows investor inflows into the forex market fell nearly 20% in April to a daily average of $200 million, dropping further to $180 million in the first three weeks of May.

The total volume of foreign portfolio inflows into the stock market also declined to N42.58 billion in April from N52.66 billion in March.

The outlook for May is much lower as an ongoing banking recapitalisation exercise spooks investment in shares of Nigerian banks.

Analysts at Coronation Merchant Bank said that the local currency bond market is also not as attractive to foreign investors anymore, with the inflation rate rising to 33.69 percent in April while market rates have failed to adjust accordingly. The CBN’s latest 150 basis-point hike, which took the benchmark rate to 26.25 percent, has not translated to higher market interest rates.

“While a 1-year T-bill yield at 25.07% is easily double anything achievable last year, it still falls miserably short of the inflation rate at 33.69%, so the inflation-adjusted return remains negative. FGN bond yields are generally somewhat lower than 1-year T-bill yields,” the Coronation Merchant bank analysts said.

Foreign investors are also concerned about repatriation risks and are preferring to go to countries like Egypt, Turkey and Pakistan ahead of Nigeria.

In its latest move to boost dollar supply in the market, the CBN on Friday, announced that international oil companies can sell their retained 50 percent of repatriated export proceeds in the Nigerian Foreign Exchange Market.

The IOCs had been restricted from selling dollars to the banks by former Governor Godwin Emefiele and mandated to instead sell to the CBN.

The CBN had placed limits on the transfer of crude export proceeds by IOCs to offshore parent company accounts before reviewing the policy and allowing them to repatriate 50 percent of their export proceeds at one go, while the remaining 50 percent can be used to settle financial obligations in Nigeria.

The move was in a bid to ease the pressure on the foreign exchange market and provide the CBN with some firepower to defend the naira when the need arose.

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