• Thursday, June 13, 2024
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CBN’s unorthodox FX rules helping to make black market bigger say analysts

CBN

The all-out effort by Nigeria’s Central Bank to defend the Naira by threatening importers and exporters with tougher punishment risks pushing more traders to the black market for their dollars, reports Bloomberg.

A severe scarcity of foreign-exchange is roiling Africa’s largest economy with the central bank responding Tuesday by ordering local banks to report exporters that fail to repatriate income made abroad. The directive comes only a day after the regulator banned importers from using external agents to pay for goods, a bid to keep money inside the nation’s borders.

The threat of punishment, which could see exporters banned from accessing dollars, won’t work, said Bamidele Ayemibo, the lead consultant at 3T Impex Trade Academy in Lagos, an adviser and trainer on exports and imports. The cost of exports is secured at the parallel-market rate, while the central bank wants to force firms to repatriate foreign currency at a loss at the much stronger official rate for the naira.

“The central bank saying they would sanction them is laughable,” he said. “If they sanction them, then they would just kill exports completely.”

For Ayemibo, the Central Bank of Nigeria is trying to avoid allowing the currency to float freely and it is enthroning a regime of unorthodox and demand control mechanisms to manage what is easily an FX supply problem.

“The CBN should do what it needs to do to encourage exporters to repatriate — first by allowing market forces to determine the price at which they sell — and then sanctioning those who don’t repatriate after that is done,” he said.

Importers are also likely to balk. Multinationals and large local manufacturers have big foreign-exchange needs and agents in Europe or Asia who purchase raw material, machinery and equipment on their behalf. The central bank is also introducing a process to verify prices of items being imported, which could cause delays.

“We expect some form of push back,” United Capital Plc said in a note.
The prognosis is in the absence of exceptions for key importers, the naira will probably weaken further in the parallel market, fueling “never-ending speculative attacks on the local unit,” United Capital said.

A spokesman for the central bank didn’t immediately answer a Bloomberg text message to his mobile phone.

All this happening at a time foreign investors who were tempted into buying Nigerian debt paying interest of 13% a year ago have been unable to move their cash out of the country.

Worse still, the rate that investors now earn for lending money to the government by purchasing 12-month Treasury bills has dropped to a 10-year low of 3.2%. On top of that, the local currency has twice been devalued against the dollar this year, risking losses when the capital is repatriated.

With their cash stranded in Nigeria, funds have few choices but to park in short-term debt. They’re waiting for the central bank to resume foreign-exchange sales that were halted in mid-March after lower oil prices dried up dollar supplies. The economic fallout from the coronavirus pandemic only exacerbated the situation.

“Some people are either stuck in the queue or they have now decided to reinvest some of the money,” said Ayodele Salami, chief investment officer at Duet Group, which has an Africa focused fund with investments in Nigeria. “There’s no level of returns that can compensate you for that risk — because the risk you are carrying is a 100% loss.”

Holders of Nigerian bonds and equities may have as much as $2.5 billion trapped in the country, Simon Kitchen, an analyst with EFG Hermes, said in a note to investors last week.

“There’s no need for anybody to worry as long as you allow us to deal with this issue in an orderly fashion,” central bank Governor Godwin Emefiele said on June 24. “It’s a guarantee, you will get paid, but be patient.”

The lower returns are not only hitting foreigners. Local pension funds that have more than 70% of their portfolios in government bonds are losing money when adjusted for inflation, which has averaged 11.8% in the past year.

“The value of pension assets will depreciate in real terms,” said Wale Olusi, head of research at United Capital Plc in Lagos. “This is very depressing for an economy with huge potential for investment in a wide range of sectors.”

The naira has been devalued twice this year after the drop in the price of oil, the country’s main foreign-exchange earner. The central bank stopped regular interventions in the foreign-exchange market in March, leaving foreign investors trapped.

The parallel dollar-market rate, which the central bank says is illegal, is near a two-year high of 477 naira. The dollar trades at about 388 naira in the more flexible investors and exporters window, where liquidity has thinned out due to a lack of inflows.

The currency shortage is now playing out in another part of the market. Licensed bureau de change operators are complaining they’re on the brink of collapse after the central bank stopped making foreign-exchange sales to them, while illegal money changers are thriving.

“People cannot pay for offices, staff, not even regulatory fees or taxes,” said Aminu Gwadebe, the president of the Association of Bureau De Change Operators, which has about 5,000 members. “We don’t have any sources, all our sources are shut down. We are the most vulnerable.”