Obinna Chima writes about major steps taken by the banking sector regulator to rebuild confidence in Nigeria’s financial market
A major concern among Foreign Portfolio
Investors (FPIs) in Nigeria since the twin shocks of the oil price and
COVID-19 had been the repatriation of their funds. Owing to this, some
investors became
nervous and decided to sit on their funds until the
coast is clear. This contributed to the slowdown in capital importation
into the country in recent time.
But, despite the challenge, the Central
Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, kept on assuring
foreign investors in the country of the safety of their funds despite
the forex scarcity. And in line with the earlier promise, the CBN last
week started the sale of forex to banks to clear the backlog of demand
in the market, which was put at $2 billion.
THISDAY gathered that the apex bank
adopted the strategy of a combination of spot and 150-day forward sales
to clear the accumulated FX demand.
While the central bank is clearing the
forex backlog, on the chaotic parallel market, the naira strengthened to
N430 to a dollar same week as against about N480 to a dollar it had
been trading in the past days, majorly due to a pronouncement of plan to
re-start the sale of the greenback to Bureau De Change (BDC) operators.
However, the clearing of the forex
backlog which commenced last Monday, has seen the bank selling $25
million daily and is expected to continue weekly until it is completely
sorted out, THISDAY learnt.
“As it is now, all the foreign portfolio
investors are relaxed because of the intervention by the apex bank.
They (CBN) have promised us that it would be weekly until everything is
cleared,” a source told THISDAY.
CBN Director, Corporate Communications,
Mr. Isaac Okoroafor, who confirmed the clearance, said: “We have always
said that once we understand the depth of the situation fully, we would
start intervening. So, we have started clearing the FX backlog.”
THISDAY also gathered that in order to
stimulate FX liquidity, CBN has also been intervening at the Investors
and Exporters’ (I&E) window, where on Tuesday and Wednesday it sold
$5 million respectively and may continue on that path this week.
Emefiele had assured foreign investors
in the country of the safety of their funds despite the scarcity of
forex the country is presently facing due to the significant drop in oil
revenue.
Speaking at a recent media briefing in
Abuja, Emefiele had allayed fears expressed by some foreign investors,
just as he guaranteed those interested in repatriating their funds that
their monies were safe.
Recalling that the country faced a
similar situation between 2015 and 2016, he said the central bank had
put in place measures to ensure an orderly exit for those interested in
doing so.
The CBN governor explained: “In 2015 and
2016, we faced the same situation. What did we do? We called a meeting
of the correspondent banks and development partners. We told them that
none of them would lose their money in Nigeria.
“And I am happy that we went through
that without anybody losing his money in Nigeria. We made sure those
that wanted to go were able to take their monies out because things
turned around and we also put in place policies that made it possible
for them to take their monies out.
“We always like to support an orderly
exit, but not an exit where everybody rushes to the door at the same
time. If there is a fire in this room and everybody rushes to the door
at the same time, I am sure the fatalities would be more than if we all
go out through the door in an orderly manner; and that is what we are
appealing to everybody.
“If you have Letters of Credit or dollar
obligations, we are asking you to be patient. There may be some delay,
but I am giving 100 per cent assurance to everybody that they would not
lose a cent of their monies if they desire to take their monies out. But
we are seeking the patience and understanding of everybody.”
Analysts Hail Move
The co-founder of Cardinal Stone
Partners Limited, a Lagos-based investment firm, Mr. Mohammed Garuba,
said clearing the backlog of forex demand in the financial market has
restored confidence in the market.
Garuba said: “I can confirm to you that the CBN started clearing the backlog on Monday, August 31.
“It was a big shock to the market and a
very pleasant surprise. On Monday, CBN supplied just $10 million,
Tuesday it did $25 million and another $25 million today (Wednesday).
“The one they did on Monday gave CBN
clarity on the total outstanding demand. So, the bank was able to get
the total volume and demand. Now, CBN knows the amount of backlog and
now has full clarity on accumulated demand to date.”
According to him, the fact that CBN has started clearing the FX backlog is giving confidence to the market.
“Most of these monies would not come
back because interest rates are too low to attract them back. So, why
waste money when you know the person would not come back? CBN is not
interested in increasing interest rates aggressively to destroy the
economy,” he said.
However, the Cardinal Stone boss
anticipated that the stock market might record some depreciation in the
short-term because of the development.
“But I believe that this strategy
adopted by CBN might make sense because the FPIs come in and hit you
when you least expected. If we would see FPIs come into the country
again, they would be honest, long-term investors who are coming to seek
good returns and I think that message has been passed.
“CBN kept to its words. It had said
there would be an orderly clearance of the FX backlog and luckily they
have lived up to that expectation. They shocked the market by doing this
when we least expected. So, I think they are also doing this ahead of
the World Bank funds and this is a show of confidence,” Garuba added.
On his part, the Chief Executive
Officer, FMDQ Group, Mr. Bola Onadele, explained that the outbreak of
the COVID-19 brought about a collapse in crude oil price, which went as
low as $10, and led to dislocation in the FX market.
According to him, whenever there’s
market dislocation, the regulator easily would think of how to stabilise
the system to ensure that there is no collapse.
“So, what CBN did was to take control of
the market. Now that the apex bank has seen that there is stability in
crude oil price, which we know has a high correlation with the FX market
in Nigeria, CBN has started taking action.
“The first one is to clear the backlog.
What has happened is that when CBN took control of the market, it
couldn’t satisfy all the demand. So, CBN has commenced sales to the
corporates, selling spot and forward,” he added.
He said the intervention by the central bank has calmed the market and strengthened investors’ confidence.
Onadele said: “Since this pandemic
started, we must acknowledge that CBN kept the futures market and
guaranteed the rates, and that is commendable.
“You have also seen that in the retail
market, the apex bank has also supported that market and you can see
that the parallel market rate is dropping. In actual fact, a lot of
people that had been sitting on dollar position are now selling.
“The expectation is that the banks would
also support the market liquidity by selling. So, the more everyone
sells, the naira would continue to strengthen. All the other markets
would benefit if the FX market ramps up again and so we should continue
to support the central bank.”
Naira Strengthens at Parallel Market
However, the expected resumption of
forex sales to BDCs saw the naira improving significantly at the
parallel market as it appreciated by about 9.3 per cent.
Currency dealers attributed the
development to the planned resumption of forex sales by the Central Bank
of Nigeria (CBN) to operators of Bureau De Change (BDC), which
according to them is expected to bolster dollar liquidity in the market.
The apex bank is expected to resume
forex sales to BDCs tomorrow. It had announced its intention to resume
forex sales to the retail segment of the market, but was forced to
postpone it because of the extension of the date for resumption of
international flights to September 5.
President, Association of Bureau De
Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said the
announcement of the plan to resume forex sales to the currency dealers
was the major factor that led to the gain recorded by the nation’s
currency against the greenback.
He said: “The plan to resume forex sales
to BDCs was what broke the camel’s back. Dollar supply to BDCs is a
potent weapon to fight against speculation. For those still speculating
in the market, they are already burning their fingers and taking losses.
“So, my advice is that when you don’t
have a genuine and effective need to use dollars, stop stockpiling the
currency. From what we are seeing, this trajectory is going to continue
and I advise members of the public to always buy when you have a purpose
for it and not buying to keep.
“What we saw in the market in the past
few weeks was not a true reflection of the value of the naira against
the dollar. We saw, even during the lockdown when flights were not
flying, everybody literally became a forex dealer. It is unfortunate.
That cannot happen in other countries. When you don’t need to make
payments abroad, what are you hoarding dollars for? It’s unfortunate.”
He expressed optimism that once his
members re-commence business by Monday, the naira exchange rate at the
parallel market would improve further.
“With just a pronouncement, you can see the impact. So, once we are back, we expect the naira to appreciate further,” he added.
The currency dealer foresees the naira
strengthening further to “between N415 to N420 to a dollar next week,”
saying “the trajectory is expected to continue towards the unified rate
of the BDC and Investors and Exporters window, which is about N386 to a
dollar.”
Gwadabe added: “That is the target that
all the operators in the forex market, that is the BDCs, the banks, the I
& E window, are targeting. So, speculators like I told you would
continue to count their losses. This is not the time to hoard, to
speculate or even to undermine the dexterity of CBN management.”
He also urged security agents to check
the illegal movement of dollar cash with the resumption of international
flights on September 5.
CBN had in a circular dated August 27,
2020, addressed to all authorised dealers, BDC operators and members of
the public, said the resumption of forex sales was part of efforts to
enhance accessibility of the greenback, particularly to travellers
following the announcement of the limited resumption of international
flights.
Purchase of forex by BDCs shall be on Monday, and Wednesdays in the first instance, it had stated.
According to the apex bank, BDCs are
expected to “ensure that their accounts with the banks are duly funded
with the equivalent naira proceeds on Fridays and Tuesdays accordingly.”
The CBN Governor recently stressed that
the CBN will continue to pursue unification of exchange rate around the
NAFEX, commonly known as the I& E window.
“Now, talking about the parallel market,
we have always said that the parallel market, or what people always
refer to as the black market, is a market for people who want to do
dealings that are not recognised by the authorities,” he added.
Going forward, it is expected that
measures adopted by the central bank to address the situation will
restore confidence in the country’s financial markets as well as bring
comfort to foreign investors.
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