Forex Inflows Hit 19-month Low

Foreign exchange inflows into the official forex market have dropped to their lowest level in the past 19 months as investors remain unimpressed by the efforts of the Central Bank of Nigeria (CBN).

Foreign exchange (forex) inflows into the official Investors and Exporters Window (IEW) of the Central Bank of Nigeria (CBN) dropped by 41.2 per cent from $1.15 billion in September 2022 to $676.80 million in October 2022, its lowest level since April 2021.

Inflows from foreign investors had declined for the fourth consecutive month to $72.0 million, the lowest in 19 months, while inflows from domestic investors dropped by 42.5 per cent in October 2022 to $604.80 million.

With the forex pressure unyielding, the naira continued its slide at the official market, dropping by 0.1 per cent to N445.75 per dollar at the weekend. Nigeria’s forex reserves also declined for the 10th consecutive week to close weekend at $37.22 billion.

At the forwards market, the naira also depreciated across all contracts with the one-month contracts dropping by 0.5 per cent to N451.06 per dollar, three-month contracts by 0.5 per cent to N460.71 per dollar, six-month contracts by 0.1 per cent to N476.91 per dollar while one-year contracts declined by 0.2 per cent to N503.46 per dollar.

Cordros Capital, a major investment banking group, attributed the low forex inflows to lack of reforms in the forex framework, higher global interest rates and weak macroeconomic narratives.

“Over the short-to-medium term, we do not expect liquidity conditions to retrace towards pre-pandemic levels due to still weak inflows from foreign investors, who contributed 53.8 per cent of total IEW inflows in 2019.

“We think foreign investors will need more convincing actions from the CBN as regards flexibility and clarity in the foreign exchange framework before a resurgence of interest in the market, as witnessed in 2017 when the IEW was established,’ Cordros Capital stated.

Analysts noted that forex liquidity conditions have remained weak at the official market despite CBN’s efforts at boosting forex inflows to the IEW through incentivising non-oil exports.

Analysts at Financial Derivatives Company (FDC) said they expected the naira to remain under pressure also at the parallel market due to low forex supply and arbitrage on the naira.

FDC noted that due to the wide disparity between the official rate and the parallel market rate and low forex supply from CBN, the parallel market has become more efficient for carrying out most foreign transactions.

The CBN had introduce a “Naira for Dollar Scheme” aimed at encouraging dollar remittances by paying N5 for every dollar received. The scheme took effect from March 8, 2021.

Cordros Capital, had said apex bank’s refusal to “drastically overhaul its foreign exchange policy and allow for proper price determination in the exchange rate is the primary reason for the divergence” between the official and parallel markets, the symptoms of which the Naira for Dollar Scheme aimed at correcting.

“We examined the CBN’s pre-pandemic interventions across the different FX windows and compared this to its 2020 interventions. We used the difference between the two periods as a proxy for the parallel market demand.

“On a balance of factors, we think the new policy will have a limited impact in the short-to-medium term. Hence, we do not believe it would lead to any significant rate convergence. Our baseline expectation is for the currency to trade between N450 per dollar and N455 per dollar at the parallel market by the end of the year,” Cordros Capital stated.

According to Cordros Capital, the effective policy measure to encourage remittances through official channels is to unify the exchange rates at the different windows by devaluing the currency towards its fair value.

“The unification is needed to eliminating the parallel market exchange rate premium. Over the long run, the need to diversify the economy’s export base is paramount to solving the exchange rate issues,” Cordros Capital stated.