Central Bank of Nigeria (CBN) is weighing the option of creating a special Open Market Operation (OMO) auction for foreign investors with the hope that it lures in badly-needed foreign exchange, according to two sources familiar with the matter.
The plan was discussed during the weekly committee meeting between the CBN governor and senior bankers on Tuesday.
The special one-year OMO, which is essentially a debt instrument issued by the CBN, will yield between 4-5 percent and will be settled in dollars at the delivery date rather than the usual practice of settling in naira through Non-Deliverable forwards, the sources, who do not want to be named, as the discussions have not been made public yet, said.
“It was initially proposed by one of the banks and the CBN is currently weighing the option as a way to attract dollar inflows,” one of the sources said.
Lower oil prices and a global pandemic, which have reduced foreign investment inflows into frontier markets, have sparked dollar shortages -reminiscent of the dark days of 2016 in Africa’s largest oil producing nation.
The CBN has devalued the naira thrice this year alone, more times than it has done in the last three years. The official naira has weakened by 24 percent to N380 per US dollar from N306 per dollar at the beginning of the year.
The devaluation has however not led to increased dollar inflows with investors irked by the slow pace of reform in the foreign exchange market. The CBN governor, Godwin Emefiele promised to end the country’s multiple exchange rate practice that had drained investor confidence and deterred investment inflows.
Emefiele told investors and the International Monetary Fund (IMF) in March of his plans to engineer a convergence of the multiple rates at the I&E window rate, which was quoted at N386/$ Wednesday.
However, while there has been some movement, a full convergence is still elusive.
What is worse is that there are fresh worries that the hitherto market-reflective I&E window rate is now being manipulated by the CBN, which may mean the naira will still be overvalued if a convergence were to happen around that rate today.
“The CBN could find it difficult to convince investors to bring their dollars in to participate in the special OMO auction, given the damage done to investor confidence by its unorthodox FX management,” an investment banker said.
“On the other hand however there might be some yield-hungry investors willing to take the risk but at a huge premium,” the banker said.
As the CBN drags on reforms, Nigeria’s situation is getting worse. The country’s dollar demand backlog is squeezing life out of businesses and further damaging investor confidence.
Several foreign investors are currently trapped in the country and have been on the queue for dollars, alongside Nigerian manufacturers and importers, for months.
Bankers estimated the dollar backlog was between $5 billion and $7 billion last month.
