CBN Governor Godwin Emefile

By JULIUS ALAGBE

If there is any single criterion or index for the reappointment of Mr. Godwin Emefiele as Governor of the Central Bank of Nigeria, CBN, it had to be stability of the local currency, the naira. At the time it was introduced in April, 2017 there was virtually no hope for the naira which had dropped against the dollar to about N500. Then the idea of multiple exchange market windows came into operations; and for two straight years the exchange has held firm.

In the last two years since the Central Bank of Nigeria’s introduce new FX regime, many analysts said Naira has become more stable. Market observers and currency traders said that there is no doubt that the Investors’ & Exporters windows, the Nigerians Autonomous Foreign Exchange (NAFEX) market has successfully stemmed incessant depreciation of the local currency, Naira.

However, the multiple forex market windows have been faulted by mainly international multilateral agencies such as the World Bank and IMF, for distorts the value of the naira and discourages foreign investment. According to them there is considerable confusion over the prevailing exchange rate which is a disincentive for them in terms of capital repatriation.

Both local and foreign analysts also think that there is growing possibility of convergence which has reduced the arbitrage activity that used to undermine the value of the naira in the parallel market. Though, some pundits see the multi-tiered exchange rate as unwelcome development, but the fact remains that free floating would be an economic suicide for Nigeria, an Economist told BusinessHallmark

Mr. Kingsley Ezoh, a senior financial expert said; “The exchange rates have been stable but Nigerians are still paying more to swap currencies. There is need to address fundamental issues but it looks like no one is ready to do that in the immediate or not at all as market seems to have settled for the mid-point”.

“Though rates are hovering at acceptable rate to the CBN, yet there are structural defects in the economy. The economy is not producing enough to earn foreign receipts other than revenue generated from oil and gas. On that note, it could be said that the nation’s fundamentals are weak.

“Low comparative advantage, high debt profile and attendant service cost and lower oil production volume are issues. Then, you look at the inflation rate, though nose-diving but still above single digit benchmark. All these put together affects the exchange rate”.

Mr. Samir Gadio, Head, Africa Strategy at Standard Chartered Bank in an email said that the Investors and Exporters’ FX window has become the most liquid FX market since its introduction in 2017. The CBN continues to sell USD in its wholesale FX window at levels (c.355-360) not that far from the investors and exporters window (I&E) rate, while it has pursued larger retail forward and spot FX sales at nominally discounted rates. Meanwhile, oil companies sell USD to the CBN at about N305 which is also the official rate in the budget.

“Further gradual FX convergence will likely materialise over time after the NIFEX fixing (discontinued in December) almost caught up with NAFEX (362.7). But a multiple exchange rate is likely to persist in the foreseeable future. There is probably limited room for arbitrage at this point because foreign investors transact in I&E window and cannot source FX via other windows at discounted rates when they exit the Nigerian market. As long as CBN FX supply remains adequate in various windows, it is unlikely that a significant shift in local demand to I&E window could take place”, Gadio said.

Also, FBNQuest in its analysts note reckoned that Nigeria’s FX policies are not popular with devotees of the free market (if such exists) but should be viewed in context. The firm noted that the country’s voracious appetite for imports has contributed to placing FX related policies on the FGN’s front burner.

“Over the past two years, the CBN’s FX reforms have resulted in improved FX liquidity. This is evident from the stability of the several exchange rates in operation. The CBN’s interbank/official rate (for priority transactions) is currently N307/US$. This compares with N361/US$ at the Investors and Exporters (I&E) window”, FBNQuest noted.

The CBN’s introduction of I&E FX window (also referred to as NAFEX) in 2017 has recorded visible successes in boosting FX liquidity and aiding price discovery. Turnover at the window amounted to US$60 billion in 2018, with the CBN supplying 28.3% of the total.

Year-to-date, total FX inflows via the I&E window stand at US$14.8 billion, with foreign portfolio investors (FPIs) accounting for 62%.

“We note that exits by FPIs recorded in Q4 were mainly due to the US policy normalisation at the time as opposed to macroeconomic slippage or potential political risks”, FBNQuest noted.

The firm further said that as for participation in the capital market, the elevated returns in Nigeria’s fixed income market have contributed to increased forex inflows. However, FPIs have adopted a cautious approach towards the equity market, which is evident from their net outflows on the NSE in the first three months of the year.

Other forex interventions by the CBN have also supported improved forex liquidity. Its secondary market intervention sales (SMIS) amounted to US$4.2 billion in the first quarter of 2019. These sales are targeted at the real sector of the economy (including manufacturers, importers of raw materials and airlines), and totaled US$2.9 billion in the first quarter.

This total includes the CBN’s recently introduced Chinese yuan interventions, which are mainly geared towards manufacturers. CNY237.6 million (US$34.9 million) was injected into the market by the CBN in the first quarter 2019. To access this segment of the window, the importer’s letter of credit must be denominated in renminbi.

“Broadly speaking, consumer goods companies under our coverage are able to source fx at will”, the firm noted.

It said that the CBN’s sales to SMEs and for invisibles amounted to US$1.32 billion in the first quarter and were offered to customers through banks at N357/US$. At its last meeting, the monetary policy committee noted that the relatively stable exchange rate alongside price stability gave it room to explore steps for enhancing growth.

“Nigeria’s FX market is still vulnerable to oil price shocks and changes in FPI sentiment. Additionally, the once sizeable current-account surplus has steadily been eroded. The need for a diversification of the revenue base and steps by the FGN to stimulate export activities cannot be overemphasized”, FBNQuest reckoned.