Nigeria’s FX demand backlog near 2016 crisis levels of $7bn

Nigeria is facing a $7 billion FX demand backlog that is rolling back ugly memories of the dark days of 2016 when manufacturers and investors were starved of dollars leading to a near collapse of the economy.

The estimate of $7 billion was arrived at by bankers who say manufacturers have unmet dollar demand of $2 billion while foreign equity investors and foreign holders of the CBN’s OMO bills account for roughly $5 billion combined.

The Central Bank of Nigeria (CBN) has long maintained that there’s enough liquidity to meet what it calls “legitimate” dollar demand, but bankers, manufacturers and foreign investors say the apex bank is struggling to fulfil dollar obligations despite repeated assurances, particularly to foreigners seeking to repatriate money.

Godfrey Mwanza, head of Africa franchise at South-Africa-based ABSA Asset Management, who has been investing in Nigeria for over 10 years, has money stuck in Nigeria like was the case in 2016.
“My experience during the last oil price crash was that I couldn’t get money out in time and so suffered the full brunt of devaluation,” said Mwanza, who sits in South Africa.

“This time around I sold very early and was able to exit 80 percent of my Nigerian holdings. The last 20 percent got stuck in the queue,” he said.

Mwanza said the dollar scarcity in Nigeria has discouraged him from investing in the country’s equities even when he’s itching to invest.

“Despite recent rallies in local stocks, I am unlikely to re-invest in Nigeria until either a meaningful devaluation happens or oil prices rise to over $55 per barrel,” Mwanza said.

While he estimates the backlog from foreign equity market investors alone is $2bn, Mwanza said “the true backlog will be higher because you have to also add foreign corporates and foreign OMO investors”.

“My understanding is that total foreign holdings in OMO securities is roughly $10bn and yields have fallen/become less attractive, so I imagine some fraction of that $10bn wants to get out but can’t and is forced to roll over,” Mwanza told BusinessDay by email.

In 2016, the Nigerian economy contracted for the first time in a quarter of a century as the CBN’s capital controls exacerbated an already precarious situation for Nigeria which was battling a slump in oil prices and local production. The CBN eventually bit the bullet by devaluing the currency and creating a separate window for investors and exporters which helped ease the dollar illiquidity and aided the economy to somewhat recover.

Dollars have expectedly become hard to come by again in Nigeria, Africa’s largest oil producer, following the collapse in international oil prices. Oil exports account for over 80 percent of dollar inflows into Nigeria, making it the largest source of the greenback into the country.

Although the CBN has weakened the official rate to N360 from N306 and allowed the rate at which investors and exporters bought dollars to weaken to N380/$, the naira still trades 20 percent weaker in the parallel market.

The disparity between the FX rates in the country has deterred foreign portfolio inflows, another main source of dollars into the economy.

“The CBN should be seeking ways to boost dollar supply in the country as a way of complementing lower dollar receipts from crude oil sales, instead it has quickly resorted to its unsuccessful demand management strategy that hammered the economy in 2016,” one economist said.

Another major source of dollars into Nigeria that is fast running into troubled waters is diaspora remittances. The CBN’s capital controls mean dollars sent into the country by Nigerians in diaspora are mandatorily converted at N374 per US dollar. That’s 20 percent weaker than the parallel market rate of N450 per dollar.

Western Union, one of the leading international money transfer operators, only agreed to pay the naira equivalent of the $1,000 sent to Chris Nwankwo by his brother in the United States last week at N374.
Nwankwo would rather he exchanged the dollars at the parallel market where he would have got more naira for less dollars.

“The mistake I made was asking my brother to send the money through a formal channel, it certainly makes more sense to beat that process and have my dollars exchanged at a higher rate,” Nwankwo, a Lagos resident, told BusinessDay, insinuating he would route his dollars through unofficial channels next time.

Nwankwo’s plight sounds all too familiar. The same scenario was constantly at play in 2016 when Nigerians sought other ways of avoiding the CBN’s capital controls to receive dollars in order to take advantage of the premium the dollars was exchanging for on the streets.

That further stoked the dollar shortage in the country as people stopped routing dollars thorough banks.
“There’s an exchange rate misalignment that has been exacerbated by the oil price crash and the CBN can either seek ways to boost supply in the market or resort to its demand management strategy of 2016 and it has opted for the latter, essentially choosing to collapse the economy on the altar of FX like in 2016,” another economist who did not want to be quoted said.

Like in 2016, the foreign exchange shortage is also forcing international banks to pull the plugs on local lenders as they fear they may struggle to repay dollars with dwindling oil receipts and the CBN rationing scarce dollars arbitrarily.

Analysts say the CBN’s actions could severely dent the credit rating of Nigerian banks and affect trade which contributes 17 percent to the country’s Gross Domestic Product (GDP).

What’s more is that when the banks bid for dollars on behalf of their clients and don’t get the dollars, the CBN refuses to refund the naira cash that was used to make the bid.

That’s not all. Bankers are also beginning to scratch their heads over how the CBN calculates their Loan to Deposit Ratio (LDR).

Last week, banks were debited N1.3 trillion for failure to meet their LDR targets.

The banks claim the CBN is no longer sticking to its own rule on the LDR but has now resorted to making arbitrary and unclear deductions. They believe the CBN’s moves are geared towards mopping up naira liquidity in order to protect the exchange rate by reducing the amount of naira chasing dollars.

“By holding on to your naira, the CBN has you where it wants you; your naira is on a very long queue for dollars and you can’t go anywhere else but wait for the CBN,” a source familiar with the matter told BusinessDay on condition of anonymity as he feared regulatory backlash for speaking publicly.