The Central Bank of Nigeria (CBN) will clear all outstanding foreign exchange obligations owed in forward contracts in the next few days as dollars trickle in from the apex bank’s most recent attempt to stabilise the naira.
Olayemi Cardoso, the CBN governor, who said this during an investor call Thursday, added that the outstanding backlog was dollars owed to five banks.
“We are confident that we will shortly be in a position where the whole issue of forwards would be behind us,” Cardoso said. “I would say in the next few days we should be in a position where the balance of the five (banks) would have been put behind us.”
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At the last Monetary Policy Committee (MPC) meeting, the CBN had disclosed that a further $400 million of the outstanding $2.2 billion was recently cleared.
The CBN has received plaudits from foreign investors with its recent reforms to increase market interest rates and allow more transparency with the pricing of the naira against the dollar in the official market.
According to Cardoso, who said Nigeria has attracted $2 billion in foreign portfolio investments this year alone, the reforms are bearing fruit.
“Last year, for example, the total amount of influx from FPI dwindled considerably to over $3 billion and already this year just from the little (reforms) we have done we have attracted $2 billion,” he said. “My point is that with the right policies, right approach, an open and transparent mechanism, inflows will start to come in.”
Inflows are indeed coming in. At $2 billion in the first two months of 2024, Nigeria has managed to attract more than the total foreign portfolio inflows of $1.15 billion it got in the whole of 2023 and about half of total foreign capital inflows of $3.9 billion that year.
The National Bureau of Statistics (NBS), which publishes data on foreign investment inflows, is yet to release data on inflows for the first quarter of 2024.
The CBN also reiterated that the naira is undervalued and that the current FX pressures are linked to panic, which is driving hurried monetization of assets.
Cardoso, however, anticipates that the currency will stabilise in the near term, supported by the recent action of the NNPC to move some of its accounts to the CBN.
Banks traded the naira at an average of N1,548 per US dollar on Friday, as the currency appreciated compared to N1,595/$ the previous day.
The CBN assured that it will supply and intervene in the FX market whenever there are distortions. The bank last month resumed dollar sales to banks in the spot market after a five-month break and has sold some $300 million since then.
The CBN also guaranteed that it would work to ensure that there is ample liquidity for free entry and exit for foreign portfolio investors. It considered this a priority in the near term.
“We think that the CBN’s recent efforts to restore market confidence and enhance communication with investors are likely to boost the investment case of Nigeria,” analysts at Lagos-based investment bank, CardinalStone said.
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“Specifically, efforts to clear the balance of existing backlogs, sanitize the FX ecosystem, and improve carry trade could attract more foreign interest,” the analysts said in a note to clients.
The apex bank also plans to push interest rates higher and has guided to higher stop rates at the upcoming OMO and Treasury Bill auctions.
Cardoso said that the stop rates are expected to edge closer to the monetary policy rate, which was jacked up by a record 400 basis points to 22.75 percent at the MPC meeting last Tuesday.
The CBN plans to increase OMO frequency and volumes to mop up liquidity and provide investment opportunities for foreign portfolio investors.
Some N1.5 trillion has been mopped up in the four months that Cardoso has been governor of the CBN. That’s a sign of the CBN’s aggressive liquidity mop up under the new governor who has set his sights on curbing accelerating inflation.
Headline inflation in Nigeria surged 29.9 percent in January, according to data by the NBS. The relentless spike in the prices of goods and services has worsened a cost of living crisis in Africa’s most populous nation and has left investors with negative real return on investment.
The CBN estimates that inflation will moderate in the medium term to 21.4 percent.
Cardoso said that the apex bank has a clear understanding of the drivers of inflation, which includes currency pressures.
The CBN plans to drive policy effectiveness and has indicated that current policies are well thought out. It also noted that corrective measures will be quickly deployed in the event of any wrong policy outcome.
Regarding the recent hike in cash reserve ratio (CRR) to 45 percent, the governor said the effective CRR before the increase was about 40 percent with those of a few banks exceeding 45 percent.
“Hence, some banks are going to get refunds under the new CRR regime, while others will be required to make payments,” Cardoso said.
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The net effect of the new CRR is about N5.0 trillion (debit to the system). However, the mop-up will be done gradually to avoid causing shock to the financial system.
The investor call with Cardoso was facilitated by the Nigerian Exchange Group, in partnership with sponsors such as international banks and CardinalStone.
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