•Will CBN sustain the gains?

It has been cheery news for the naira in the last one week. For the first time in three years, the local currency regained over 16 per cent of its value against the dollar. It yesterday appreciated to N430/$ from N520/$ at the parallel market last Wednesday. The interbank rate remained stable at N305 to the dollar. A new forex policy by the Central Bank of Nigeria (CBN) requiring more dollar inflows to commercial banks, the rise in Foreign Reserves and the relative peace in the Niger Delta are responsible for the positive feedback.   But will the CBN sustain the new offensive against the dollar and keep the naira on a sustainable recovery path? OKWY IROEGBU-CHIKEZIE and COLLINS NWEZE report.

The naira – Nigeria’s currency is gradually regaining its lost glory. Its recovery became obvious after it regained over N90 against the dollar at the parallel market within a week. The naira assault against the dollar is likely to continue this week, as currency speculators, who have for months ‘warehoused’ dollars began to offload their stock.
It all started immediately the Central Bank of Nigeria (CBN), through a statement by its spokesman Isaac Okoroafor, announced a new forex policy, which allows commercial banks to have access more dollars to fund forex users at the retail end of the market.
The policy has empowered banks to sell more forex to travellers through Personal Travel Allowances (PTAs), Business Travel Allowances (BTAs), school fees and medical payments.
Okorafor said that providing direct additional funding to banks to meet Nigerians personal, business travel, medical needs and school fees took immediate effect, saying the apex bank expects such retail transactions to be settled at a rate not exceeding 20 per cent above the interbank market rate.
The statement reads: “Having cleared the historic backlog of matured letters of credit at the inception of the current flexible exchange rate system, the CBN would immediately begin to provide foreign exchange to all commercial banks to meet the needs of both personal travel allowances (PTA) and business travel allowances (BTA) for onward sale to customers.
“All banks would receive amounts commensurate with their demand per week, which would be sold to customers who meet usual basic documentary requirements.”
According to the CBN, the needs of parents, guardians and sponsors to make payments of school and educational fees for their children and wards would be met under the new dispensation. It, however, stated that such payments must be made by commercial banks directly to the institution specified by the customer.
The CBN has promised to ensure that the process is as smooth as possible and that as many customers as possible get the foreign exchange on genuine demands.
In order to further increase the availability of forex to all end-users, the CBN has decided to significantly reduce the tenor of its forward sales from the current maximum cycle of 180 days to 60 days from the date of transaction.
In order to further ease travellers’ burden and ensure that transactions are settled at much more competitive exchange rates, the CBN also directed all banks to open forex retail outlets at major airports as soon as logistics permit.
Okoroafor said the apex bank has stated the implementation of its articulated programme to clear all the unfilled orders in the interbank forex market. He said that given CBN’s plan to meet all unfilled orders, “provision of forex to the manufacturing sector would remain the CBN’s strong priority. We will no longer impose allocation/utilisation rules on commercial banks, and also implement an effective intervention programme to support the inter-bank market to ensure adequate liquidity necessary to deliver an efficient forex market.”
He said the CBN’s objective to continuously and to vigorously pursue a transparent, liquid, and efficient forex market, the bank reiterates that it would neither tolerate unscrupulous actions nor hesitate to bring serious sanctions on offenders, be they banks or their employees.
The bank therefore urged market participants to assist in ensuring that these new measures engender the preservation of our external reserves, stability of our financial system and growth of our economy to the benefit of all Nigerians.

Bankers react

Former Executive Director, Keystone Bank Limited, Richard Obire, said the CBN’s capacity to increase forex supply has increased, brining more confidence into the market.
He also noted that the restiveness in the Niger Delta has subsided, thus making it possible for oil production to rise to 2.2 million barrels of crude oil per day. Besides, Obire said the cooperation between the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC members has made it possible for crude oil prices’ recovery.
The former bank chief said the increase in foreign reserves to nearly $30 billion and the positive outlook for the crude oil prices make the fundamentals right for continued naira appreciation.
His words: “The CBN has promised to raise dollar supply and also sell at 20 per cent above the interbank rate retail end forex users. This has brought calm to the market and made many people happy. However, I doubt if the CBN will be able to sustain the drive which I think is only going to help in a short while.”
Describing the development as a good omen for the economy, Obire added that everything must be done to make the exchange rate stable.
He said: “Speculators that stored dollars are now releasing them because of the ongoing decline in the value of the dollar. I cannot call the naira recovery a trend yet, until the CBN is able to sustain it for at least one quarter.”
He said that CBN’s plans to sell dollars for BTA, PTA, school fees and medical fees is good but that the promise to sell must be real. “If people go to the banks and they are not able to buy, then there will be problem and the volatility in the market will return”, he cautioned.
Associate – Research, Eczellon Capital Limited, Mustapha Suberu, believes the policy is not sustainable and that it remains a temporary measure to rattle speculators form the market. He said the best thing would be for the CBN to implement full price discovery, to attract foreign investment into economy.
Suberu said: “CBN’s supply of dollars can only last for a while. What is more important is inflow from the outside and that can only happen where there is full price discovery and stability in the market. It’s an interim measure to get out speculators and close the gap between the parallel and black markets.”
Suberu, who said the N375/$ rate was a guidance rate, added that the price of the naira against the dollar in the parallel market cannot be a true reflection of the rate.
 
OPS also speaks

President, Manufacturers’ Association of Nigeria (MAN), Dr. Frank Jacobs, described the reported naira appreciation on the heels of CBN’s new policy as good news to his members. He, however, said “it’s early to measure its effect on the manufacturing sector.” According to him, manufacturing has a long gestation period and the success of the new policy cannot be gauged in a hurry.
Jacobs said: “We pray the naira appreciates and goes further to about N300 to a dollar for instance, we wish that the official rate will equal the parallel market. Going forward it would reduce the cost of raw material and subsequently the cost of production.”
He called for tenacity of purpose on the part of the CBN to see to its full implementation, as according to him, the problem has not that of dearth of policies but their implementation.
The Director-General, Lagos Chamber of Commerce & Industry (LCCI), Mr. Muda Yusuf, also welcomed the naira appreciation as good news to the OPS. He expressed concern on the policy’s sustainability as its initial success may be cosmetic.
According to him the CBN cannot fund the forex market alone as doing so would not be sustainable.
Yusuf said: “We need other reforms to encourage other people to bring in money as confidence building is very essential here. The position now is that CBN is throwing money into the market and it simply cannot be sustained going forward”.

Describing the CBN policy review as a partial step in the right direction, he said it could marginally moderate the pressure of forex at the retail end of the market as the focus was essentially on retail transactions, covering school fees, medical bills, PTA and BTA.
The LCCI chief described as cheery news that the apex bank had cleared all backlog of mature obligations that existed at the inception of the “flexible” exchange rate policy.

The worry, however, according to him, is that the fundamental shortcomings of the forex policy remain unaddressed, warning that it may affect the sustainability of the current gains in the exchange rate.

He called for a framework to encourage forex inflows from sources other than the CBN.
The LCCI director-general said: “Inflows of forex from capital importation, export proceeds and diaspora remittances should be liberalised to strengthen the supply side of the market.

“The continuation of the administrative allocation of forex will continue to pose transparency challenge in the system. The scope for market allocation of forex needs to increase as the forex market still suffers from overregulation.”
He called for the relaxation of the regulation not only to improve liquidity but for the pressure on exchange rate to abate in the market. According to him, these are the real concerns of key players in the economy.
“It is critical to remove all impediments to autonomous inflow of forex into the economy”, Yusuf added.

CBN continues to
intervene in the market

In keeping with its determination to increase liquidity in the forex market, the CBN yesterday released another $100 million into the wholesale forwards segment of the market and pumped an additional $80 million into the banks specifically for the settlement of dollar demand for school fees, medicals and PTA, among others.

Okoroafor restated the CBN commitment to the provision of enough forex for legitimate business remains unshaken, reiterating that it would do “everything possible” to ensure the steady supply of forex to the market.

The apex bank’s decision to make available large amounts of forex to triggered the appreciation of the naira by over N90 in less than one week. But, there are fears in the market that the local currency may well be on a permanent journey to its natural value, which some analysts have put at below N300 to the dollar.

The CBN had maintained that much of the dollar demand had been a bubble created by speculators and hoarders of the greenback.
On a radio programme yesterday, the apex bank warned market players and keepers of dollars to make hay and sell their holdings in order to avoid heavy losses.

The measures announced by the CBN on February 20 may ease some of the severe foreign currency liquidity pressure being faced by local banks, Fitch Ratings have said.

The most important aspect of the CBN’s announcement is a plan to normalise the forex interbank market, with its intention to clear the backlog of overdue foreign currency obligations owed by banks to international creditors.
These are primarily trade finance obligations owed to correspondent banks. Besides, 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 promised to make the provision of foreign currency to the manufacturing sector a priority. With the restrictions eased, larger banks with greater access to foreign currency will be free to lend to the smaller banks with restricted access to international funding. The CBN has also stated its intention to increase intervention in the forex interbank market to increase supply.

With the latest intervention, the CBN has reduced the maximum waiting times for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180.

The first of these forwards was announced yesterday for $500 million, with banks reported to have bought around $371 million in one-month and two-month forwards.
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 the local banks have long provided trade finance facilities to importers.
The currency scarcity and exchange rate weakness have made it harder for importers reliant on naira-denominated cash flows to service United States (U.S.) 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. There has been a steady reduction in overdue trade-related obligations since late 2016, helped by more frequent foreign currency auctions by the CBN, and 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.

A report by Afrinvest West Africa Limited, an investment and research firm, said the naira has shed 46.5 per cent and 66.3 per cent in the interbank and parallel markets respectively between June 2014 and January 2017, while the spread between the two rates reached an all-time high of N215.00 last week.

The company said: “However, the political and economic implications of the forex shortages motivated the directive issued by the National Economic Council to the CBN last week for a more flexible forex market structure and closure of the gap between interbank and parallel market rates.

“In the 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 an 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.
Afrinvest said: “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 we 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.”

Banks as biggest
beneficiaries of new policy

No doubt, commercial banks will remain one of the biggest beneficiaries of the new forex policy. The lenders have also started to call for bids from retail end-users in preparation for the first travel allowances, school fees and medical bills auction.

The CBN is expected to as from today begin to release weekly forex cash (every Tuesday) to commercial and merchant banks to meet the needs at retail end of the market.
The lenders are already creating awareness, informing customers interested in buying PTAs and BTAs, school fees and medical bills payment about requirements needed to access the forex.

A report from the CBN Financial Markets Department released at the weekend, showed that 10 banks, which could not been confirmed as at last night, used N54 billion to fund $162 million Forex Forwards for 30-day tenor, maturing on March 27. The wholesale intervention rate was between N330 to N335 to dollar.

Another six unnamed banks used N18.6 billion to fund $58.52 million Forex Forwards for 60-day tenor maturing April 25, 2017. The wholesale intervention rate was between N315 to N320 to dollar.

The interventions, 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 a billion dollar. 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 to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/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 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.