Nigeria losing FX battle as banks limit dollar spending abroad
Nigerian banks limiting how much dollars customers can spend abroad is the latest sign of Nigeria’s worsening foreign exchange crisis.
The banks are making moves last seen during the dark days of 2016 when an acute dollar scarcity hobbled the balance sheet of lenders and paved way for a big naira devaluation.
Like they did in 2016, lenders are again imposing customer spending limits to prevent a foreign exchange hole from growing too quickly to unmanageable levels on their balance sheets and will only ease the limits as dollar liquidity improves, according to Adesoji Solanke, a banking analyst at Renaissance Capital.
“The limits on debit card spending is reflective of the ongoing dollar liquidity squeeze on the ground as when you spend abroad, banks typically have to buy back the dollars from the CBN,” Solanke said by email.
“If the dollars are not forthcoming and the banks continue using their proprietary dollars with unabated customer spending limits, it could lead to a dollar liquidity mismatch on their balance sheets,” Solanke added.
In another sign of the growing FX crisis, the CBN added maize to a list of items banned from buying dollars from the banks last week as it battles a 19 percent slump in its dollar reserves in the last one year.
The actions by the banks and the CBN, coupled with an ever widening spread between the official rate and black market rate, are signs the country is losing the battle to revive its ailing fx market, according to some senior bankers.
The naira’s black market rate fell to N470 per dollar Monday, according to Aboki fx, which collates rates from street traders. That’s the weakest since February 2017, according to Bloomberg data.
While the CBN continues to publish an official N360/$ rate on its website, trading platform, FMDQ, quoted N388/$ Monday. That means the spread between the official and black market rate is anywhere between N82 to N110/$.
Sources say some heavyweights from bank treasurers to manufacturers with dollar obligations are fast resorting to buying dollars from the black market as liquidity dries up in the official market.
The CBN, which announced monetary policy decisions Monday, was mute on the country’s acute dollar shortages and how its management of the fx market was evolving.
Investors and analysts were hoping the CBN would provide some clarity on why the CBN still quotes N360/$ as the official exchange rate on its website while the FMDQ is quoting the same official rate at a weaker rate of N388/$. The CBN also furnished the finance ministry with a N360/$ rate for the years through 2020 to 2023 in the Medium Term expenditure Framework (MTEF).
That’s despite the CBN Governor Godwin Emefiele saying efforts were being made to merge the official rate with the Investors and Exporters window rate of N380/$.
Updates on the current foreign exchange backlog were also keenly anticipated.
The CBN was also expected to state whether it was behind the latest action by banks to suspend or reduce the amount their customers can spend abroad using debit cards in a bid to limit foreign currency settlement risk.
The last time banks took this action in 2016, it was ordered by the CBN.
“Unsurprisingly, the CBN provided no clarity about the foreign exchange market and how it planned to clear the piling backlog at the MPC meeting even when that was what most people were looking forward to hear,” said Omotola Abimbola, an analyst at Chapel Hill Denham.
“Clearly, the recent actions by the CBN and banks are reminiscent of 2016 and investors need clarity now more than ever,” Abimbola added.
Hammered by the collapse in oil prices, Nigeria’s main foreign exchange earner, the CBN has responded to acute dollar shortages in the country by rationing dollar sales to maintain an artificial exchange rate like it did in 2016.
The CBN however lost that battle in 2016, devaluing the currency by over 50 percent from N199/$ to N306/$. Foreign investors were burned and some haven’t returned to Nigeria since then.