Competition in the Nigerian banking sector is driving down the cost of dollars to as cheap as N357.50k, lower than N360 that the Central Bank of Nigeria (CBN) directed them to sell.
The CBN in 2017 said it would sell dollars to banks at N357 and direct them to sell to their customers at N360.FA report by FBNQuest available to BusinessDay indicates that the CBN’s sales to Small and Medium Enterprises (SMEs) and for invisibles (personal travel allowance inclusive) amounted to $1.2 billion in the second quarter (Q2) 2019 and were offered to customers through banks at N357/$.
In a bid to remain competitive, banks were offering a resale rate as low as N357.50/$ as opposed to the N360/$ upper limit prescribed by the CBN.
Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said,
“Nigeria does not operate fixed exchange rate rather it operates guided one,” saying if dollar is being sold at N357.50k, it means that it is appreciating.
According to the report, the CBN has supported the FX market by providing liquidity through various interventions. For instance, its secondary market intervention sales (wholesale and retail combined) totalled $4.4 billion in Q1 2019 and $3.7 billion in the second quarter of the year.
In addition, through the CBN’s Chinese yuan interventions, mainly geared towards manufacturers, CNY127.7 million ($18.8m) was injected into the market in Q2 2019. To access this segment of the window, the importer’s letter of credit must be denominated in Renminbi.
The report states that oil market movements will continue to be a source of concern for Nigeria’s macro environment as the exchange rate relies on healthy oil price levels. “As for “hot money” from FPIs, we suspect that possible rate cuts by the US Federal Open Market Committee could lead to further inflows into the market and underpin the naira exchange rate,” analysts at FBNQuest say.
The price of oil stood at $57.4 per barrel as at yesterday, lower than $70.38 per barrel in April 5 2017.
Akinwunmi says if the price of oil continues to fall, things will not remain the same. Godwin Emefiele, CBN governor, said foreign reserves were enough to cover some months of imports.
Nigeria’s external reserves stood at $44.69 billion as at August 7, 2019, according to the numbers on the CBN website.
Oil receipts (including oil related taxes) contribute directly to external reserves. The crude oil price has averaged $64/b year-to-date (ytd). Furthermore, oil production has been somewhat stable. In the absence of an oil price crash, we assume that the stability in the fx market will continue.
Foreign portfolio investors (FPIs) contribute indirectly to the external reserves. Since July yields on government securities have generally declined due to various CBN policies including a reduction in the frequency of OMO sales. This may cause some pressure on the I&E window as the market is unable to attract fresh inflows from FPIs due to a downward movement in returns. Yields on the NTB (T-bill) market currently range between 10.50% and 12.00%.
Aggregate foreign exchange inflows through the Central Bank of Nigeria (CBN) amounted to $35.28 billion (52.8%), while the outflow stood at $17.78 billion (96.7%), resulting in a net inflow of $17.40 billion in the first quarter of 2019.
