Nigeria’s local currency, Naira has for the past three days remained flat at N860/$ amid cooling demand pressure at the parallel segment of the market.
On Monday August 21, parallel market FX dealers bought and sold dollar to customers at N855 and N860, almost same with last Thursday August 17 when they bought the greenback at N840 and sold at N860.
The Naira had in the trading week to August 18 gained ground by 48 basis points (bps) to close at N739.52/$ at I&E FX Window from N740.60/$ the preceding week.
The Central Bank of Nigeria recently announced the commencement of the Price Verification System Portal (PVS) as requisite for Form ‘M’ application.
The apex bank also announced the operational mechanism for Bureau De Change Operations in Nigeria.
For BDCs, the CBN said among others that the spread on buying and selling by BDC Operators shall be within an allowable limit of -2.5percent to +2.5 percent of the Nigerian foreign exchange market window weighted average rate of the previous day.
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This is in addition to mandatory rendition of BDC Operators statutory period reports on the Financial Institution Foreign Rendition System (FIFX)
CBN said that from August 31, all applications for Form ‘M’, which is the declaration of intention to import goods into Nigeria, shall be accompanied by a valid Price Verification report from the PVS portal. With the PVS, the apex bank could distinguish those who genuinely need forex and halt the crisis in the sector.
“We expect to see the appreciation of the Naira continue as the CBN continues to implement its recent FX policies,” said United Capital Research analysts, who also expect continued pressure on the Naira across all market segments, “given that FX pressures will persist as Dollar earnings remain weak”.
Kalu Aja, a personal finance consultant, who noted that the system was created to stop importers from using imports to take dollars out of the economy, adding that, “To counter this, the CBN is saying that if you want to import you go through the verification system you have to put the invoices of imports on the database.”
“This way CBN gets a benchmark price for imports of goods and services this way. He said that if we operate an open market with willing buyers and sellers, why are we explaining to the CBN what I’m doing with FX?
“This is just bureaucracy. The CBN should focus on other things like monetary policy, and also remove the ban from the 42 listed items
“We have a gap between the I&E window and the parallel market because the parallel market has no limitations. People are going to the market without limits, open up the I&E market to everyone,” Aja said.
“The Price Verification System portal is a good development and may partly checkmate the unfortunate tendencies of importers to inflate invoices for the purpose of hiking their foreign currency demand. Such excess FX demand is either to unduly repatriate foreign currency out of the country or to take advantage of possible roundtripping activities, given the scarcity of foreign currency and the spread between the official and parallel market rates,” said Abiola Rasaq, former Economist and Head, Investor Relations at United Bank for Africa Plc.
“Hence, the PVS portal helps to stem inflated foreign currency demand. In my view, the PVS needs to be used in conjunction with effective verification of purpose of FX utilization in a way that does not stifle genuine trades and I say this because there are even some dubious acclaimed importers who may take advantage of unscrupulous and innocent reviews of bankers to process FX demand for wrong items,” he said.
“We have in the past seen an importer who consistently raised Letters of Credit for acclaimed importation of hundreds of wheel chairs almost every quarter at exorbitant amount without even being in such business. So, the CBN would need the cooperation and diligence of banks to ensure effective KYC that does not undermine and slow down genuine importers.
“There is also the question of who is the foreign seller, as some importers can also directly and/or indirectly the sellers of the supposed imports, under different arrangements that promotes unethical practices of inflating invoices and unduly exporting the scarce foreign currency in the country,” Rasaq added.
JP Morgan in its recent report estimates Nigeria’s net FX reserves at $3.7billion, saying that it is “significantly lower than prior estimates, owing to larger-than-expected currency swaps and borrowing against existing reserves”.
“The foreign exchange market will remain in focus given the likely lower starting point for net FX reserves, with an overall balance of payments deficit pointing towards continued FX pressure,” JP Morgan said.
The Nigerian National Petroleum Limited (NNPCL) recently secured a $3billion emergency crude oil loan from the African Export -Import Bank (AFREXIM). The loan facility allows the NNPCL to pay its taxes and royalties to the Federal Government of Nigeria (FGN) and better equip the FGN to stabilise the Naira.
The disbursement of this fund is scheduled to occur in multiple tranches, in line with the FGN’s needs. The facility would be repaid from fractions of the NNPCL’s proceeds from future oil production and is not expected to deny the FGN’s future revenue from crude oil production.
“The AFREXIM loan is a welcome short-term fix; however, Nigeria’s inherent FX market issues need permanent respite,” according to Meristem research analysts.