The new foreign exchange policy actions introduced by the Central Bank of Nigeria (CBN) saw the naira extending its gains on the parallel market yesterday, appreciating significantly by N14 to close at N501 to the dollar, stronger than N515/$ from the previous day and N525/$ on Monday.
Also, the buy rate for the greenback crashed on the parallel market yesterday to below N490 to the dollar, as foreign currency speculators who had held on to the dollar for several weeks rushed to sell off the currency in the wake of renewed confidence in the CBN’s ability to meet demand on the interbank market.
This is just as the chief executive of Economic Associates Limited, Dr. Ayo Teriba, urged the central bank not to relent in its efforts to rebuild foreign reserves to at least $36 billion that can cover nine months of imports, in order to close the gap between the interbank and parallel market rates.
Also, global ratings agency, Fitch Ratings yesterday said the new policy actions announced by the CBN, might ease some of the severe foreign currency liquidity pressure faced by banks in the country.
Fitch said that the most important aspect of the CBN’s announcement was the plan to normalise the FX interbank market.
It said in a statement that the intention of the CBN was to clear the backlog of overdue foreign currency obligations owed by banks to international creditors.
It explained: “These are primarily trade finance obligations owed to correspondent banks. In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy.”
The CBN on Monday removed the preferential treatment for certain sectors of the economy, but added that providing foreign currency to the manufacturing sector was still a priority.
Fitch pointed out that with restrictions eased, larger banks with greater access to foreign currency would be free to lend to the smaller banks whose access to international funding was restricted.
The CBN also indicated its intention to increase intervention in the FX interbank market to increase supply and reduced the maximum waiting time for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180.
The first of these forwards amounting to $500 million was offered by the central bank on Tuesday, but 23 banks were only able to buy $371 million in one-month and two-month forwards.
“This should help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy. The CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations.
“Nigeria is highly dependent on imports and Nigerian banks have long provided trade finance facilities to importers. Currency scarcity and exchange rate weakness have made it harder for importers reliant on naira-denominated cash flows to service US dollar-denominated trade finance lines, forcing some banks to restructure their obligations with international correspondent banks last year. Correspondent creditor banks agreed to maturity extensions and were duly compensated for this,” Fitch explained.
It revealed that there was a steady reduction in overdue trade-related obligations since late 2016, helped by more frequent foreign currency auctions by the CBN.
It however stated that this week’s announcement should further ease foreign currency flows into the banks.
“However, the operating environment for Nigerian banks is still challenged by the oil price shock, slow Gross Domestic Product (GDP) growth, pressure on the naira, scarce access to foreign currency and policy uncertainty.
“The CBN plan will also make it easier for individuals and business customers to meet their foreign currency travel and other personal needs because it will sell foreign currency to banks at a rate not exceeding 20 per cent over the interbank (official) rate for these purposes,” it added.
Meanwhile, the CBN yesterday stated that it was already making some headway with the new FX policy, adding that with over $30 billion foreign reserves in its coffers, it now has enough firepower to continue to intervene in the interbank FX market.
Speaking early yesterday morning in an interview on Arise News network, CBN’s Director of Financial Market, Mr. Emmanuel Ukeje said the central bank was almost done with its adjustments in the interbank market, and would now intervene promptly.
He said the CBN will rely on its over $30 billion reserves to continue to intervene in the market, adding that the reserves were enough for this.
“As of now, we have a reserve of over $30 billion in our coffers and with that the central bank is ready to play in the interbank market,” Ukeje said.
He added: “Also, don’t forget that the central bank a few months ago was able to take out $4.2 billion from the market and having taken all that, what is left is residual and that is why it is fine-tuning these policies which hitherto people said were not working.
“That is the whole idea of this policy and we are gradually moving towards a convergence of the interbank and parallel markets because we have the firepower to play in that market now.”
Defending the policy of the bank, Ukeje said: “The interbank market yesterday (Tuesday) closed at the nominal rate which was about N305 because the central bank intervened in that market with a lot of funds.
“Not only was it forwards that we did yesterday (Tuesday), we also intervened at the interbank market and we had about four or five banks bidding for funds from the central bank which had the market closing at N305.”
Also, commenting on the new FX policy actions by the CBN, the chief executive of Economic Associates Limited expressed confidence that the gap between the parallel and the official markets would narrow further as Nigeria’s foreign reserves improve.
Dr. Teriba said the naira appreciated yesterday because the supply to the interbank market was improving.
“The key point is that the supply situation is improving. A year ago, the CBN had no capacity to intervene. Today, they are regaining the capacity to intervene. So I think the message is not just about what happened in the last 24 hours but more like what is likely to happen in the near future.
“Given the improvement in the foreign reserves, you should expect the gap between the parallel market rate and the official rate to continue to narrow and as long as you see more improvement in the reserves, the gap should eventually close.
“There is also the possibility, given the outlook for the year, that oil prices are not just twice as high as what they were last year, the outlook for them is stable.
“With a bit of luck you can even have better oil prices and oil production domestically has also improved, so there are chances that it will improve further.
“Now we have about $30 billion in foreign reserves from $22 billion approaching $20 billion previously. Now that we have $30 billion, if you take $36 billion as the threshold, which will give us about nine months import cover, the gap should close and you might begin to see appreciation in the official rate as well.”
Teriba who refused to predict at what rate the naira will be trading against the dollar by the end of this year, said: “What we should do now is to focus on the reserves.
“If we get to a threshold like $36 billion, I will be surprised to see a gap between the official and the parallel markets and I will expect an appreciation in the official rate as well.
“At what rate the appreciation is going to take place, I cannot tell you. However, I can tell you the broad direction in which things will move but I cannot put specific figures.”
Speaking further on the policy measures announced by the CBN, Teriba said boosting supply does not amount to access.
“It has always been a supply problem. Trying to restrict demand was the wrong approach, it simply heightened anxiety,” he said.
He added that the FX market will be liberalised as soon as the CBN regains its capacity to fully intervene in the market, adding that the restrictions were put in place because the CBN lacked the capacity to intervene in the market.
“The CBN obstructionist strategy was as a result of its inability to meet demand for the dollar. But as supply improves all that will change.
“As long as the capacity to supply keeps improving, the gap between the parallel and official markets will continue to narrow, “he said.
On the possibility of a single foreign exchange window, he said the multiple windows arose because of the CBN’s inability to meet demand, adding that once that is no longer the case, all the rates will converge.