Investors’ confidence is beginning to be restored in the financial market as more investment opportunities open, following recent policy reforms by the Central Bank of Nigeria (CBN).
According to analysts, the reform which has characterised President Bola Ahmed Tinubu’s early days in office, particularly in the financial sector as acknowledged by global rating agencies, gives a positive outlook for the economy.
Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, said the reform is, “Changing that which is the established order to something else with a view to making the society a better place.
Since the suspension of Godwin Emefiele, CBN’s governor and the appointment of Folashodun Adebisi Shonubi, as the acting CBN governor, by Tinubu, the apex bank has introduced some foreign exchange reforms, which analysts described as a welcome development that would result in boosting investors’ confidence.
“It is restoring confidence already. See what is happening in the Stock market, with massive appreciation in the equity prices and fixed income securities market,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.
He said, “What we need now is to increase the supply of foreign exchange to stabilise the value of the Naira.”
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said already there are clear indications of elevated investors’ confidence, improvement in the government fiscal space, higher prospects of exchange rate stability in the near term, and positive expectations of better economic governance.
On June 14, 2023 the CBN collapsed all segments of foreign exchange markets into the Investors and Exporters (I&E) forex window. This was made known by Angela Sere-Ejembi, director of financial markets in a circular she signed.
About five days after the FX liberalisation, the stock market soared by 5.5 percent. The benchmark All Share Index (ASI) appreciated to 59,000.96 points on Friday from 55,930.97 points at the beginning of the week, representing a 5.5 percent increase.
According to the CBN’s circular, applications for medicals, school fees, business travel allowance and personal travel allowance (BTA/PTA), and SMEs would continue to be processed through deposit money banks.
The CBN also re-introduced the “Willing Buyer, Willing Seller” model at the I&E window, saying that operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window, the circular stated.
“The operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places,” the circular said.
Furthermore, the circular said proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC futures limits on overbought positions shall be zero.
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The CBN re-introduced order-based two-way quotes, with bid-ask spread of 411. It said all transactions shall be cleared by a Central Counter Party (CCP).
As seen in the circular, the CBN also reintroduced the Order Book to ensure transparency of orders and seamless execution of trades. The operational hours of trades shall be from 9am to 4pm, Nigeria time, the CBN said.
“Further guidance on these matters shall be communicated in due course. All market participants and the general public are kindly enjoined to abide by these rules,” Sere-Ejembi said in the circular.
Before the major FX reforms implemented on June 14, the CBN only allowed a slow depreciation of the official exchange rate, which was insufficient to bring the supply and demand of foreign currency into balance, placing increasing pressure on the exchange rate in the parallel market, according to the World Bank in a new report.
The official rate depreciated by 11 percent from January 2022 through May 2023, while the parallel market rate depreciated by 30 percent, with the parallel market rate premium widening from 37 percent in January 2022 to 63 percent in May 2023, the World Bank said.
During this period, the report said the CBN, the largest single supplier of FX to the Nigerian economy, continued to suppress FX demand. The use of FX remained banned for the importation of 43 product categories, and the CBN also limited the size of its interventions in the FX market, and thus, the FX supply for imports of those goods and services that are not banned.
Nigeria’s previous exchange rate management stifled business activity, investment, and growth weakening the fiscal position, and boosting inflationary pressures. Despite higher oil exports and reduced CBN interventions, external reserves fell from their recent high of $41.8 billion in October 2021 (helped by official sector inflows) to $34.9 billion in June 2023.
Another confidence boosting reform of the CBN was the removal of restriction on access to domiciliary accounts, which analysts said would increase liquidity in the financial market.
The CBN on the same June 2023, in a letter to all banks said cash deposits into domiciliary accounts will not be restricted, and that customers shall have unfettered and unrestricted access to funds in their accounts.
The letter signed by Haruna Mustafa, the CBN’s director, banking supervision department, said the FX policy change aims to promote transparency, liquidity, and price discovery in the FX market in order to improve FX supply.
“Deposit money banks (DMBs) shall provide returns to the CBN including the purpose for such transactions. Cash deposits into domiciliary accounts will not be restricted, subject to DMBs conducting proper know your customers (KYC) due diligence, and adhering to the spirit and letter of extant anti-money laundering/ combating the financing of terrorism laws and other relevant rules and regulations,” the letter said.
“This will increase the available dollars in the financial system in the medium term and help support the Naira,” said Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest.
According to Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, an orderly relaxation of capital control and other forex restriction rules is a positive development to restore confidence and attract FX liquidity.
For Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, “it will enhance liquidity in the forex market as it provides an incentive to operate domiciliary accounts. With the restrictions lifted, there is likely to be an increase in remittances through formal channels.”
The CBN said it would prioritise orderly settlement of any committed FX forward transactions as they fall due in order to further boost market confidence.
“We believe that foreign exchange liberalisation brings benefits to Nigerian equity investors and will encourage foreign investors to bring money into the country again,” analysts at Coronation Research said in a report.
“The long-term declines in both foreign direct investment (FDI) and foreign portfolio investments (FPI) are set to be reversed, in our view. Within the equity market we favour the bank sector. Banks not only tend to hold net long positions in US dollars but are also beneficiaries of liberalised FX trading and the increased liquidity that implies,” it further stated.
For at least a decade Nigeria’s multilateral financing partners have consistently called for three key reforms: removal of fuel subsidies; unification of Naira/ US$ exchange rates (to be achieved through a free float of the Naira); power sector reform, according to the report.
The World Bank, the International Monetary Fund (IMF) and many other development agencies and donor nations have made these demands, and until now they have been disappointed, the Coronation report stated.
“It can be argued that Nigeria’s reluctance to enact these reforms resulted in a low level of investment by multilateral and public sector bodies (certainly in comparison with the packages made available to some other emerging markets). And it cannot be denied that foreign direct investment has fallen over many years. So, now that two key reforms have been enacted (and reforms to the power sector have already been announced), what is stopping these institutions from engaging with Nigeria again? There appears to be no better time to support the country,” analysts at Coronation said.
