FX reform brings in $270m, first major foreign investment

The Central Bank of Nigeria (CBN) strategy to boost supply in the country’s FX market through its monetary policies is yielding fruit as the nation received $270million worth of foreign portfolio investment from a single transaction last week.

This brings respite to something of a ‘supply drought’ currently being experienced in the Nigerian FX market and indicates better days ahead, market watchers say.

This resounding statement of confidence in the CBN’s innovative strategy to improve FX supply in the nation could not have come at a better time, they added.

This comes on the heels of banks commencement of FX sales to BDCs which market watchers say may force the rate in this segment of the FX market to hover around $/N350.

Informed market sources told BusinessDay at the weekend that liquidity risk is still very much part of the FX market, adding that “the country will have to continue to pay a premium for this until the market achieves a decent equilibrium.”

They recalled that following last week’s suspension of some lenders by  the CBN over non-remittance of  Nigerian National Petroleum Corporation  (NNPC) monies into the Treasury Single Account (TSA), FX demand which ordinarily should have gone to the interbank market through the affected banks, is finding its way to the parallel market, thereby stoking naira weakness against the greenback at that parallel market.

“The market requires transparency, credible price formation and policy consistency to bolster confidence, as these are the factors that will drive liquidity. The CBN continues to relentlessly spearhead initiatives in the FX market, promoting transparency, credibility, professional market conduct, among others, towards an effective, liquid and efficient market,” the source added.
There are indications that more inflows will be recorded into the Nigerian FX market as the CBN’s strategies on the exchange rate, interest rate and the OTC FX Futures provide the necessary architecture for appropriate compensation for the current economic fundamentals, attendant inflation and liquidity risks.

The inter-bank FX market closed at $/N314.95 for the week ending Aug, 26, 2016, showing a slight appreciation of the naira by circa 1% when compared with the previous week.
“The Nigerian FX market is on a certain path towards reform as expectations of a full recovery remain high. The collaborative actions of the CBN, Authorised Dealers, FMDQ and other market participants point towards this.

“Government policies must be highly accommodating and consistent to attract and retain foreign portfolio investments (FPIs) and Foreign Direct Investment (FDIs).  On the other hand, a well-articulated long-term support programme is required to galvanise domestic production in order to drastically cut the import  bill.

“Stakeholders will need to exercise patience and resilience to achieve a liquid FX market that will deliver a fair exchange rate for the naira. These relentless efforts will gradually and unquestionably yield positive results”, said a renowned source within the financial market, who did not want his name in print because he was not authorised to speak on the matter.
Realistically, analysts believe Nigeria would first achieve the required availability of USD before it starts thinking of a lower $/N rate, which is really a demand and supply issue.
They noted that the CBN is not letting up on efforts to return stability and sanity to the official FX markets.

The CBN had in the course of the month of August, issued a series of circulars aimed at addressing supply to the FX market to the ultimate benefit of the end-users and the economy.
For instance, Authorised Dealers are to buy from approved International Money Transfer Operators (IMTOs) at a maximum of 10% above the inter-bank rate which is interpreted as the FMDQ FX daily close.
Also, the selling rate of the FX from IMTOs by the Authorised Dealers to the Bureaux-de-Change (BDCs) shall not exceed a margin of 1.5%, while the FX cash purchased by the BDCs from the Authorised Dealers shall be sold to end-users at a rate not exceeding 2% of their (the BDCs’) buying rate.

In addition, all funds being retailed by BDCs (regardless of source) shall be at a maximum margin of 2%.
FX dealers believe that these measures will serve to make the BDC rate drop to a range of $/N350 – N360 in a very short space of time.

In addition, BDCs are not to sell FX to the retail end-users without the appropriate documentation for retail transactions – school fees, medical bills, personal/business travel, among others.
“These are commendable actions by the CBN and their implementation will collectively serve to bring about a more stable and effectively priced naira,” analysts added.
Informed market sources further confirmed to BusinessDay that Free Funds will likely trade at $/N360 when the 41 items stoking the Free Funds/Parallel Market are returned to the Inter-Bank Market.

“The free funds/parallel market rate will continue to undermine the CBN’s agenda and achievements in the FX market. The CBN should take the next bold and pragmatic step to immediately move the 41 items currently disallowed from the authorised FX market to the inter-bank FX market.”

Analysts said these items should be imported through Letters of Credit (L/Cs) payment mode. To discourage these imports, locally produced goods of similar quality must be achieved.
They added that the CBN should invest in a well-structured Economic Development Fund Programme (EDF Program) which will encourage  local manufacturers of the 40 items (the 41st item being foreign investments and not an import product) to issue 30-year debt securities.

“The private sector due diligence assessment will validate the genuineness of the manufacturer, support the business and report on its progress.

The CBN EDF will need to invest at a rate that will deliver an extremely competitive interest rate to the local manufacturers. The CBN should also provide adequate rebates on the FX costs for the capital expenditure of these local manufacturers. This is how the locally produced goods will offer better value. Imports will become unprofitable. Attendant sharp practices at the known trade-related government agencies will vanish,” another market source said.

“The Economic Development Fund Programme should include more import items. The programme should include funding for the primary mortgage institutions. This is how the CBN can drive its economic development agenda in an organised manner to deliver long-term economic return. Foreign Investments (the 41st item) should only be allowed when the CBN is able to monitor the foreign currency denominated investments made by Nigerian entities that are funded from the FX market”, they added.