I & E Forex Window One Year After

By Obinna Chima

Necessity they say is the mother of invention.

Indeed, this proverb played out in Nigeria when the country was faced with what has been described as one of its worse foreign exchange (forex) crisis, which also contributed to the economy going into a recession then.

The situation, which occurred between 2016 and the first four months of 2017, then saw the Central Bank of Nigeria (CBN) taking various measures in its bid to save the nation’s currency and restore confidence in the economy.

But after various measures were unable to calm the storm in the forex market then, the Investors’ and Exporters’ (I&E) forex window, which was created in April 2017, has proved to be the magic wand.

One year after its creation, the impact of the forex window on the market has been positive as it has attracted over $20 billion since it was set up.

The central bank had explained that that the purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.

It had listed eligible transactions under the new window to include invisible transactions such as loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management service and consultancy fees.

Also, on the eligible list was software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions including ‘miscellaneous payments’ as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.

While explaining that the invisible transactions under this window excludes international airlines ticket sales’ remittances, the CBN added that the window coversBills of Collection and any other trade-related payment obligations, which are at the instance of the customer.

It is worthy of note that supply of forex  to the window isthrough portfolio investors, exporters, authorised dealers and other parties with forex to exchange to naira.

The CBN is a market participant at the window to promote liquidity and professional market conduct.

Taking cognisance of the slow progress made by corporates in on-boarding the FMDQ OTC Securities Exchange (FMDQ) Thomson Reuters FX Trading & Auction Systems, participants at the window trade via telephone.

To provide price discovery to the market, the FMDQ ischarged with polling buying and selling rates and other relevant information from the major participants in the market to provide participants with the requisite price discovery, and the CBN with the indicative market depth until the market migrates to the FX Trading systems.

As part of the operational requirements of the window, exchange rates of the transactions in the window are usually agreed between authorised dealers and their counterparties.

This forex window has contributed significantly to the significant growth recorded by Nigeria’s forex reserves.

For instance, Nigeria’s reserves which stood at $30.731 billion was the forex window was introduced, is presently at about $48 billion, while the naira has been stable at N360 to a dollar, as against the depreciation to about N520 billion the economy witnessed before the I & E window was opened.

Today, most activities now occur on I&E window, with Fitch Ratings recently acknowledging that the rate on the I&E “should now be considered the relevant exchange rate”.

The contribution of the I & E to the accretion of the country’s reserves stems from the fact that given that the amount of inflows in that window hasexceeded many people’s expectations and willing buyers have been unable to pick up all the supply, the CBN have bought more dollars in that segment than it has sold.

So, the Bank’s participation in that market has been a net positive to the forex reserves.

 But not all forex inflows fromthe I & E window go into theforex reserves as the forex market segment operates as a free “willing buyer, willing seller” market, which explains why its operational exchange rate of about N360/US$1 is higher than those of other segments.

Clearly, a significant portion of the inflows into that market do not get to the CBN because they are bought by willing importers who operate in that market.

The CBN operates in that market as a “residual” participant: buying excesses and supplying shortfalls, as the case may be.

Nevertheless, the most significant factor that contributed to the accretion of the country’s reserves is thesharp decline in the country’s import bill, as a direct result of the June 2015 CBN’s policy to restrict forex access to 41-items that can be produced locally.

Despite the initial pushbacks against the policy, the central bank’s dogged implementation of the forex restriction on those 41-items had led to a 65 per cent drop in the country’s monthly import bill, from an average of $5.5 billion to $1.9 billion, as of the first half of 2017, the CBN had disclosed, with the figure expected to have risen further at the end of 2017.

Also, the recovery of crude oil prices has  supported the reserves accretion.

To analysts at Afrinvest Securities Limited, the dominance of foreign investors’ participation in the Nigerian equity market again, “came to the fore as the launch of the I & E forex window has attracted more foreign portfolio investors (FPIs) inflows into equities with positive market sentiment resulting in an increased domestic participation.”

Also, the CBN Governor,  Mr. Godwin Emefiele, pointed out that the forex window was established to allow more investors come into the country.

Emefiele said: “We want more people to come and invest in the economy, and that was why we introduced the Investors’ & Exporters’ Window. We want a forex market that will be determined by demand and supply. It has helped in forex flow and led to the appreciation in the naira we are seeing today.”

Also, the Deputy Governor, Economic Policy, CBN, Dr. Joseph Nnanna, described the I & E window as “a mighty success”, saying it has “performed beyond our expectations”.

“It is a huge success and I believe other countries can copy that from us,” he said.

Acknowledging the vital contribution the I & E window had made to the Nigerian economy, promoters of the MSCI Emerging Markets index last year announced their decision to retain the MSCI Nigeria Indexes on its MSCI Frontier Markets Indexes, after an initial threat to delist Nigeria, citing the positiveperformance of the I & E window as the major reason for the decision.

On his part, the chief executive, Financial Derivatives Company Limited, Mr. Bismark Rewane, noted that the creation of the window was a good move on the part of the CBN as it will lead closer to the emergence of a Real Effective Exchange Rate (REER) for the country.

He said: “Any measure that increases the supply of forex and the number of suppliers will help to reduce the dominance of the CBN as the major supplier of forex in the market and move us closer to the emergence of a Real Effective Exchange Rate. This will attract more investors and lead us closer to a perfect market.”

To the Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investors’ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.

However, analysts have stressed the need for the federal government to address thecountry’s high import dependence which explains why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation. Today, about a third of Nigeria’s forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money merely for transfer payments. Also, the country’s infrastructure deficit explains the huge level of importation of processed and final goods.

All these need to be addressed to ensure that the country’s exchange rate remains stable as well as to achieve a sustainable economic growth.