Central Bank of Nigeria (CBN) in the first three months of 2020 sold the highest foreign currencies in six years.
Foreign currency sales reached $11 billion in the first quarter (Q1), 64 percent more than the apex bank sold in the same period last year. This is also the biggest sale by value since $14.22 billion was sold in the first three months of 2014.
“The figure affirmed the exodus of foreign investors in the first quarter of 2020. The bulk of the dollar demand would have come from foreign portfolio investors who were exiting emerging markets in Q1:2020 due to the COVID-19 pandemic,” Ayodeji Ebo, managing director, Afrinvest Securities Limited, says.
That, he notes, impacted on yields in the fixed income market within that period as well as the equities market within the first quarter.
Nigeria’s foreign reserve, from which the CBN sells dollars, is seen as unsustainable to meet the country’s FX needs, forcing two currency adjustments since March.
“It is a dangerous trend for the economy due to the risk it poses for our external reserves,” Uche Uwaleke, a professor of capital market at the Nasarawa State University, Keffi, states.
The implication, he says, is that at that attrition rate and in the absence of improved inflows from oil revenue, the about $36 billion foreign reserves will drop to levels insufficient to meet minimum threshold of three months merchandise imports.
“I must also note that the unusual size of the intervention, in spite of supply chain disruptions, is not unconnected with the huge sums committed to contain the health crisis occasioned by COVID-19 involving imports of medical equipment,” Uwaleke notes.
Another reason, he says, could also be to meet forex demand of foreign investors exiting the country in the wake of the pandemic.
The “devaluation” of the naira is also in line with exchange windows unification conditions of Breton Woods Institution for financing cash-strapped Federal Government.
BusinessDay analysis of CBN’s forex sales data for Q1 2020 shows that while the value of foreign currencies sales has grown, the rate has actually slowed from recent years given the low base between 2016 and 2018.
In the Q1, the interbank sales fell by 62 percent year-on-year to $188 million, the lowest since 2013, while I&E plus SME and Invisibles sales grew 175 percent to $7.24 billion. BDC sales remained flat at $3.63 billion.
Dollar inflow stood at $43.42 billion in the first quarter, growing at a much slower pace from last year. The CBN accounted for 35 percent of all inflow versus 45 percent in the same period in 2019.
“I believe the very high FX demand in Q1 was due to a combination of factors in connection with COVID-19,” Taiwo Oyedele, head of tax at PwC, notes.
On one hand he says many portfolio investors were selling off their naira investments and repatriating their capital in hard currencies to preserve value. Also, due to expectations of a devaluation of naira and FX scarcity there was speculative demand.
“I therefore expect demand to moderate subsequently given the near unification of exchange rate and some level of recovery in crude oil price,” Oyedele states.
The rest of the inflow through Autonomous Sources slowed by 6 percent points to 29 percent to $28.43 billion. Notably, non-oil exports doubled while the decline in capital inflow was less steep than was in the quarter last year.
Invisibles were pressured on the back of a 75 percent decline in Home Remittances, which had grown 285 percent last year. Inflows from capital importations and oil companies were also adversely affected.
In terms of utilisation, 24 percent of FX in the quarter was used for imports with food product ($1.44bn) as the largest use by importers (10% of total FX utilisation in the period).
Invisibles accounted for 76 percent of FX use with financial services at $10.54 billion, making up 74 percent of utilisation in the period.
Olusegun Akintunde, financial market analyst at Polaris Bank Limited, was first surprised at the 76 percent composition of invisible, saying it was manufacturing that takes most part of the CBN FX sales.
Anyway, looking at the quantum of CBN FX sales in Q1 2020, he says it was a pointer to why the recent adjustments in FX rate witnessed so far became inevitable.
If the trend continues in the preceding quarters, he says more pressure would be put on the nation’s reserves and this might force another round of devaluation or adjustment. Even though the $3.4 billion IMF loan gave the country’s Foreign Reserve temporarily respite from its free fall, a consistent decline is inevitable if FX sales of this magnitude continues in the preceding Quarters.
“The entire picture shows the imbalance nature of our economy. We import most of our raw materials and finished goods. Aside huge legitimate demand for the green back, the situation is now worsen by increasing speculative and hedging purpose demand,” Akintunde says.
