The Central Bank of Nigeria (CBN) has gone tough to arrest sharp practices in the Foreign Exchange (forex) market especially in the parallel section.
To demonstrate its commitment to increasing liquidity in the foreign exchange market, the apex bank, within two weeks, supplied a total of $570 million to the market made up of $80 million for Personal Travel Allowances, medical fees and school fees, $100 million in wholesale forwards, while another $350 million was injected into the interbank market.
Reiterating its positions on forex, in a statement signed by the Acting Director, Corporate Communication, Isaac Okorafor, the CBN said that its commitment to providing enough forex for legitimate business remains unshaken, stressing that it would do “everything possible” to ensure the steady supply of forex to the market.
It will be recalled that efforts by the CBN in making available large amounts of forex to the market has led to the appreciation of the Naira by over N85 in less than one week. There were fears in the market that the local currency may well be on a permanent journey to its natural value put by some analysts at less than N300 to the dollar.
The general believe of the CBN and stakeholders is that much of the dollar demand had been a bubble created by speculators and hoarders of the greenback. On a radio programme, the apex bank warned market players and keepers of dollars to make hay and sell their holdings in order to avoid heavy losses.
Compelled by the rules of the CBN, it was reported that 16 banks raised N72 billion to fund $220 million forex allocations under the Forex Forwards policy meant to stabilise the naira. As at the time of preparing this report, the banks were calling for bids from retail end-users in preparation for the business travel allowances, school fees and medical bills auction. The CBN has been committed to its weekly release of forex cash (every Tuesday) to commercial and merchant banks to meet needs at retail end of the market.
A CBN Financial Markets Department report showed that 10 banks, which could not be identified as at press time, with N54 billion funded $162 million Forex Forwards for 30-day tenor maturing 27th of this month. The wholesale intervention rate was between N330 and N335 to the dollar. Six banks, also unnamed, funded $58.52 million Forex Forwards for 60-day tenor, maturing April 25 with N18.6 billion. The wholesale intervention rate was between N315 and N320 to the dollar.
The intervention, the CBN said, was meant to deepen dollar liquidity in commercial banks, sustain efforts to strengthen the naira against the dollar and ensure that forex is available to genuine users. Specifically, the drastic fall in the price of crude oil, which constitutes the largest component of Nigeria’s forex reserves, has cut dollar earnings from about $3.2 billion monthly to about $1 billion. This has negatively impacted on the value of the naira. Some of the measures put in place by the CBN to end the crisis include the first Naira-Settled Over-the-Counter (OTC), Forex Futures Market (FFM) launched on June 27, 2016 with FMDQ OTC Securities Exchange.
The Naira-Settled OTC Forex Futures are non-deliverable forwards or a contract where parties agree on an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity or settlement date. On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The OTC Forex Futures contract is an effective exchange rate management tool supported by a transparent price driven by a two-way quote market. The contracts assist the CBN in managing the volatility in the spot forex market, thereby promoting stability and entrenching market confidence.
A report by Afrinvest West Africa Limited, an investment and research firm, said the naira shed 46.5 per cent and 66.3 per cent in the interbank and parallel markets between June 2014 and January 2017. The spread between the two rates reached an all-time high of N215.00 last month.
However, the political and economic implications of the forex shortages motivated the directive issued by the National Economic Council to the CBN last month for a more flexible forex market structure and closure of the gap between interbank and parallel market rates. In light of this, the CBN issued a new policy action on the 21st February, 2017, which is expected to increase forex allocations to retail end users while reducing the demand pressures in the parallel market.
The success of the CBN’s aggressive intervention and moderation in demand in the unofficial market led the naira to post its biggest one-week rally of 13 per cent in more than three years in the parallel market, appreciating from a trough of N520 to dollar to a three-month high of N460 to dollar as speculators with short naira positions sold off.
It has reported that foreign exchange speculators have lost over N100 million within three days after the Central Bank of Nigeria (CBN) massively injected dollars into the interbank market. Many of the speculators panicked as news about the CBN’s intervention hit the market. Already, there are heightened fears among traders and other market participants who are yet to recover from the losses owing to sharp and sudden appreciation of the Naira.
CBN’s Acting Director, Corporate Communication, confirmed the development, reiterating that with improving reserve levels, the Bank was determined to continuously make forex available to all genuine customers through their banks, advising those hoarding the greenback to reduce their losses by selling their dollar stock. Market watchers said there was likelihood of a liquidity glut as banks were beginning to send out salespeople to scout for customers to buy off their dollars to avoid losses arising from the expected further appreciation of the naira.
According to analysts, personal and business travel allowances, school fees and medical fees have been estimated to account for less than 20 per cent of total forex demand in the country, hence there is still a large volume of demand that could pressure rate at the parallel market. While stakeholders believe the successful implementation of the new forex directive would ease pressure in the parallel market, flexibility in pricing and allocation in the interbank market remains a necessity to restore confidence in the system.