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Published On: Mon, Apr 16th, 2018

New FX window rescues economy, say experts



Stability of Nigeria’s foreign exchange market has been largely attributed to the introduction of the Investors’ and Exporters foreign exchange (I&E FX) window by the Central Bank of Nigeria (CBN) in 2017. Economists agree that the window has increased the supply of foreign exchange and built investor confidence in the markets liquidity.

The window was introduced on April 24, 2017, after the local currency exchanged for N525 to the dollar as a result of shortage of forex caused by a major fall in crude oil prices and a decline in output caused by the disruptive activities of militants in the Niger-Delta, who serially blew up oil installations.

Although the value of the naira declined -18 per cent to USD/N360.1 on the NAFEX at the close of business at the weekend falling from USD/N306 when it was introduced a year ago, it has, however, recorded a 6 per cent appreciation at the black market rising to USD/N362 as against USD/N385 on April 24, 2017.  The local currency has largely been pegged at an official rate of USD/N305, a rate that has prevailed since August 2016.

“The introduction of Investors’ &Exporters Forex window is one of the brightest achievements of the Central Bank. It has helped in the recovery of economy,” argues Abayomi Ajayi, research analyst at EDC Securities Limited. According to Ajayi, “the turnover of activities at the I&E FX window has been fundamental to economic growth witnessed in 2017, which enabled the economy turn a tough corner.”

Aside the stability in the forex market, investors have shown confidence in the economy following the NAFEX, which has allowed market forces to increasingly determine the value of the naira.

Consequently, portfolio investment (an investment made by an investor who is not involved in the management of a company) into the country rose 304 per cent to $732.91 billion in 2017 from $181.29 billion in the previous year, underpinned by a 323 per cent rise in equity inflow to N365.73 billion. The Nigerian Stock market saw a 46 per cent appreciation in 2017 and has since the beginning of 2018 recorded a 6.72 per cent increase year-to-date.

The turnover of NAFEX in 2017 was over $30 billion. “The volume of dollar transactions recorded in I&E FX window is more than the country’s reserves. It has ensured market stability,” explains Aminu Gwadabe, president, Association of Bureau de Change of Nigeria (ABCON). “There was zero confidence of investors’ in the foreign exchange market before the introduction of the I&E FX window.”, he says.

Capital inflow into Nigeria was bolstered by a massive leap of 1,218 per cent in foreign borrowings to $316.46 billion in 2017, pushing Nigeria’s total external debt to $1.89 trillion at the end of the year. Indeed, with external debt ballooning there has been growing concern that the country may be heading for another debt overhang as national debt has risen to N2, 172.58 trillion at the end of last year.

Before the launch of the autonomous forex window, the CBN undertook several measures to curtail volatility in the market such as restricting importers of 41 items from accessing dollars from the official forex market. Although this policy reduced the country’s import bills for some time, but as oil price continued to pick up in 2016, it has been on the upswing before declining again the Q3 2017 aided by reduction in the importation of rice due to CBN’s massive intervention in the agricultural sector through the Anchor Borrowers’ Programme (ABP) launched on November 2015, which has again reserved the trend.

Recovery of oil prices has also ameliorated forex volatility, enhancing the CBN’s ability to intervene in the market more frequently, which has seen the clearing of demand backlogs. Analysts observe that the country’s foreign reserve is heading towards $50 billion, having reached $46.21 billion, which is the highest it has attained in five years. And if the trend continues, Nigeria’s credit rating should move upwards, lowering its future cost of overseas borrowing.

Also, with increased forex liquidity in the economy, inflation rate has consistently slowed since reaching a 12 year high, when it rose to 18.7 per cent in January last year.  It has since slowed to 13.3 per cent in March, which is the lowest in two years. The apex bank has its eyes on achieving single digit inflation rate, which made it reluctant to lower interest ratefrom 14 per cent, where it has been pegged since July 2016 despite several entreaties.

Nonetheless, multiple exchange rates that still exist in the country’s Forex market pose a threat to the system. There are yet room for arbitrage, in spite of convergence that has been achieved at the NAFEX window and black market.

The I&E FX Window was a product of circumstance, claimed David Adonrin, managing director, HighCap Securities Ltd. “A proper Foreign exchange market is developed when markets forces are allowed to determine the price of the currency. We are yet to get there,” he claimed.

He believes more needs to be done to eliminate the multiple exchange rates in the country. His position on the remove of multiple exchange rates in Nigeria was also collaborated by Ajayi of EDC Securities.

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