CBN’s snail-pace FX reforms frustrates foreign investors

“The world will not wait endlessly for a country with all the risk of a frontier market but returns lower than a developed market to get its act together.”

“Somehow, Nigeria acts as though the world should wait. It’s quite shocking to say the least.”

Those were the words of one foreign investor who, in expressing her frustration at the slow pace of the Central Bank of Nigeria (CBN)’s foreign exchange market reforms, highlighted the unattractiveness of Nigeria at this time.

Foreign investors are growing increasingly impatient with the slow pace of the FX reforms, according to multiple interviews with investors who questioned the commitment of the CBN to enthrone a fully liberalized FX market where banks are allowed to trade the naira freely.

For the investors, the FX reforms have been due for over eight years now and even though new President Bola Tinubu led them to believe the reforms will happen quickly, it hasn’t been at the pace they expected.

Nigeria may have only just appointed a new CBN governor in Olayemi Cardoso in September. Still, investors say there can be no honeymoon for the former Citibank executive who has his work cut out for him.

The investors are hoping Cardoso will quickly put the finishing touches to the reforms that started some five months ago to help them decide on whether to invest in Nigeria.

They would like the CBN to take further steps to restore investor confidence in the market before the end of the month.

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These steps would entail enthroning a truly liberalised foreign exchange market without any form of price suppression, committing to a clear-cut plan to clear the foreign exchange backlog estimated to be around $10 billion and allowing short term rates rise from the meagre 10 percent to a rate closer to inflation which printed at 26.72 percent in September.

“There’s some sort of a consensus that if nothing happens between now and the end of the month, it’s a signal that the CBN is not serious and it will take even more effort to restore confidence in the country by that time,” a foreign investor who did not want to be named said.

The move to allow the naira to weaken by some 40 percent in one fell swoop in June was applauded by investors. With banks told they could trade the naira freely, it was a marked departure from years of a hard peg.

However, sources familiar with the market say the restrictions emerged after the CBN began to have second thoughts about allowing the naira to weaken further due to a dearth of dollar supply in the market.

Banks that quoted a dollar at above N799 were blocked from buying dollars from the CBN, which has been the single largest seller of dollars in the market.

That spooked the market once again, drained it of already thin autonomous dollar supply and reopened the gap between the official and parallel market rate.

It has also led to underhand dealings by bankers, some of whom now process second checks from customers who want to buy dollars at the discounted official rate.

For instance, a client could offer N850 to buy each dollar at N770/$ from the bank rather than buy on the streets at N1000/$. While the client officially bids at the N770/$ rate, a second check is prepared where the balance of N80/$ is paid to the banker who ensures the client’s bid is successful.

The half-cooked reforms mean it has been all pain and no gain for one of the world’s worst-performing currencies-the naira- in 2023, whose 40 percent slump since June has not been enough to restore investor confidence.

It took five months for the CBN to take what markets had expected to be the logical next step since devaluing the currency in June- dropping the ban on dollar sales to importers of some 43 items from rice to milk only last Thursday.

The ban had pushed demand to the black market, complicating the CBN’s goal to have a single FX market.

The next step towards achieving a single FX market and fostering transparency should be to allow oil companies to sell dollars at the official market again rather than the current practice of selling to the CBN.

That move has however not happened just yet with the latest circular of a long list of confusing CBN circulars (which the CBN should by now have collapsed into one) silent on the matter.

“It may be clear that the new CBN is seeking a departure from its old ways but there’s an urgent need to send a strong signal of its unwavering commitment to the fx reforms,” another foreign investor said.

Scraping its multiple circulars, allowing oil companies to sell dollars in the open market and restoring Over the Counter (OTC) FX futures to enable investors hedge against currency volatility, are some of the actions being expected from the CBN.

Other than the line removing the restriction of fx sales to importers of the “notorious” 43 items, the CBN’s latest circular did not directly address any of the issues stated above.