CBN’s plan to limit intervention in I&E window on track

Emerging data on Nigeria’s foreign exchange inflows into the investors and exporters (I&E) forex window show that the Central Bank of Nigeria (CBN) is keeping to its plan to reduce intervention in the dynamics of the market.

Inflows into the market dropped to six-month low following a significant decline by 99.3 percent in interventions by the apex bank, which hitherto was a dominant player in the market.

Godwin Emefiele, the CBN governor, said at the last Monetary Policy Committee (MPC) meeting briefing that the bank since January had not intervened in the I&E window.

The market has always operated within a band of around N409 to the dollar. At some point, it attained N412 and N413 and began to move, and that is how it is supposed to move. “The CBN job is to moderate the market in line with where we think exchange rate should be,” Emefiele had said.

Data from the FMDQ captured in a report by FSDH Research show that total foreign exchange inflow into the window decreased by 39.48 percent to $565.9 million in February 2021, compared to $935.2 million in September 2020.

The inflows comprised of foreign direct investment (FDI), which fell to $7.5 million in February 2021 from $30.8 million in September 2020; foreign portfolio investment (FPI) $17.9 million in February 2021 ($36.8m in September 2020), other corporate $9.3 million in February 2021 ($22.4m in September 2020), and the CBN $2.9 million in February 2021 ($434.5m in September 2020).

Others include inflows from exporters, which dropped to $175.7 million in February 2021 from ($206.8m in September 2020), individuals $2.5 million in February 2021 from ($29.4m in September 2020), and non-bank corporate, which declined from $350.1 million in September 2020, to $175.5 million in February 2021.

Inflows from the CBN fell by 99.3 percent from $434.5 million in September 2020 to $2.9 million in February 2021.

Despite the positive GDP growth in the fourth quarter of 2020, inflows from FDI and FPI remain low in the first two months of 2021.

This suggests low investors’ confidence amid uncertainty relating to foreign exchange management and insecurity concerns, analysts at FSDH said.

Despite rising crude oil prices, Nigeria’s External Reserves have lost 5.7 percent of its value from January 25 to March 17, 2021, according to the report.

Challenged oil inflows due to OPEC’s cuts, weaker foreign investment inflows, high demand for foreign currency to finance imports and other needs, and possible clearance of foreign exchange backlogs are factors that continue to weaken external reserves.

The foreign exchange market continues to witness supply shortage of foreign currency to meet its demand. Consequently, the gap between the various markets keeps expanding.

As of March 16, 2021, the naira on the I&E window closed at N409.67/$, representing a year-to-date appreciation of 0.14 percent. It depreciated by 5.43 percent in the parallel market to N485/$. Meanwhile, on the CBN official window, the naira remained stable at N379/$.

“Foreign exchange pressure will continue into the second quarter owing to limited inflows from both crude and non-oil sources, rising imports, and a backlog of foreign currency demand,” the analysts noted.

Day-on-day, naira weakened by 0.15 to close at N409.30k per dollar last Thursday as against N4408.67k/$ on the previous day, data from the FMDQ indicated.

Currency traders who participated in the trading on Thursday maintained bids at between N401.10k and N413.00k/$.

Exchange rate of the local currency remained flat at N485 at the Bureau De Change (BDC) segment of the FX market, while it firmed by N1.00k to N485/$ on Thursday from N486/$ on Wednesday at the parallel market.

A Lagos-based economist who spoke with BusinessDay on condition of anonymity said reducing the FX intervention was coming too early, saying rather the CBN should increase supply to quicken the convergence of the various exchange rates.