Dollar-Yuan interventions and naira’s stability


The measures introduced by the the Central Bank of Nigeria (CBN) to curb foreign exchange (forex) volatility have helped the naira to regain its stability. COLLINS NWEZE writes that the introduction of the Investors’ & Exporters’ (I&E) Forex Window and the regular dollar/Yuan interventions have also ensured the settlement of forex demand at the retail end of the market.

THOSE who witnessed the naira exchanging at N520 to the dollar at the parallel market barely two years ago cannot but appreciate the impact of the Central Bank of Nigeria (CBN) policies on the local currency.

Today, with key policy initiatives, especially the introduction of the Investors’ & Exporters’ Forex Window, the apex bank has brought convergence in the market, keeping the naira stable at N362 to a dollar at the parallel market.

The apex bank has continually intervened in the forex market at the retail end, supplying both the dollar and Yuan to meet forex users’ demands.

In the first two weeks of introducing I&E Foreign Exchange Window, forex speculators lost over N500 million, as the CBN sustained its dollar interventions in the interbank market. The losses grew to over N1 billion in the first two months after more foreigners began to use the window. The impact of the window on the forex market has deepened.

Besides, the economy has enjoyed major inflow of forex in recent months with over $51 billion recorded in the I&E FX Window.

Also known as the willing-buyer, willing-seller window, the I&E Forex window, allows foreign investors to find buyers for their dollars at a mutually-agreed price. The CBN controls about 15 per cent of all the transactions carried out in the window.

The hitherto problem faced by many forex users accessing forex for their holidays trips had disappeared with the prevailing level of stability and liquidity in the forex market.

The introduction coming of I&E Forex window was followed by continuous interventions by the CBN which enabled banks and Bureau de Change (BDC) operators to meet forex demand at the retail end of the market.

As at the last count, the exchange rate stood at N362/$1 at both the BDC and parallel markets. The official rate for the local currency stood at N305.6 to the dollar.

Aside establishing the I&E Forex window, the special forex window established by the CBN for Small and Medium Enterprises (SMEs) allocates $20,000 per business per quarter. It has helped the SMEs import “eligible finished and semi-finished items” needed for SMEs operators.

According to the apex bank, its special intervention was necessitated by its findings that many SMEs were being crowded out of the forex space by large firms.


Dollar/Yuan interventions


The CBN recently injected $340 million into the interbank retail Secondary Market Intervention Sales (SMIS). It was in addition to the sale of 69 million Chinese Yuan (CNY) in the spot and short-tenored forwards.

The figures obtained from the CBN showed that the United States (U.S.) dollar denominated interventions were only for concerns in the agricultural and raw material sectors.

CBN’s Acting Director Corporate Communications Isaac Okorafor said the Chinese Yuan sales were through a combination of spot and 15-day tenors, explaining that the exercise, in line with its guidelines, were for the payment of Renminbi denominated Letters of Credit for agriculture, raw materials and machinery.

Okorafor, who explained that the requests attended to, were bids received from authorised dealers, adding that Renminbi’s availability was sure to ease pressure on the local forex market, attributed the relative stability in the market to the continued intervention of the CBN as well as the sustained increase in crude oil prices in the international market.

He restated the apex bank’s commitment to ensuring that all sectors have unfettered access to the forex required for the business concerns, in both the U.S. and Chinese currencies.

On Friday, July 20, the CBN announced the commencement of its intervention in the sale of forex in Chinese Yuan (CNY), marking the concrete commencement of the Bilateral Currency Swap Agreement (BCSA) signed with the People’s Bank of China (PBoC) on April 27.

The CBN had in the statement announcing the kick-off of the sale foreclosed predetermined spread on the sale of FX Forwards by authorised dealers to end-users under the Special SMIS-Retail. It added that authorised dealers would be allowed to earn 50 kobo on the customers’ bids.


Apex bank seeks lifestyle changes


CBN Governor Godwin Emefiele had earlier called for a change of lifestyles among Nigerians to sustain naira’s recovery against the dollar. He said in a campaign shared by Okorafor: “The size of Nigeria’s reserves and the value of the naira critically depend on our lifestyles and on the value and types of imports we allow into the country.”

Emefiele’s message implied that a change in consumption pattern from foreign to indigenous goods would impact positively on the value of the local currency.

Analysts said that the CBN’s assurance to stakeholders that it will continue to intervene in the forex market, a promise it has kept for more than seven months stabilised the market.

But, to speculators, stability in the forex market is bad news anyday. They prefer volatility which makes them to declare more profits.

Head Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the forex market has lost its drive for profitability and is no longer exciting for players.

He said the boom time for forex dealers was over after the CBN kept its dollar intervention promises.

Ezun said: “In terms of forex business, it is not as exciting as it used to be. What makes the market exciting is volatility. The operators are not always happy when market becomes stable, because their profit margin drops. The profit-taking opportunity in the market is very lean at present and so are the turnover and spread.”

He said the local currency crisis was triggered by dip in crude oil prices, which adversely affected Nigeria’s foreign reserves and created acute dollar shortages. It was the need to curb these dollar shortages and stabilise the naira against world currencies that prompted CBN’s regularly dollar inject into the market to narrow the spread between the official and black market rates.

The measure has not only led to convergence between the parallel and black market rates, but has chased currency speculators out of the market.

As banks get dollar supplies to meet the demand of genuine forex users, the black market operators, whose cost of operation remained the lowest in the value chain, have also remained in business.

“The black market operators do not need licence to operate, neither do they demand for documentation from forex buyers. They are simply doing cash and carry business and have largely benefited from the rate convergence although their profit margin has also dropped,” a Lagos-based BDC operator, Isah Yakubu, said.

According to him, black market forex has been in operation for over a century, adding that patronage for this market has continued at all times, not-withstanding the state of the economy and forex market.

To the currency speculators, who buy dollars for keep and resell when it appreciates, the forex business has become nightmarish after the CBN sustained its interventions. After recording huge losses in the local and foreign currencies, the speculators seem to have been forced out of the forex market.

Afrinvest West Africa Limited Managing Director Ike Chioke attributed the jump in foreign inflows to the development in the forex market, particularly the launch of the I&E forex window in April.

He said: “The knock-on effects of strong portfolio flows are already evident in performance of the domestic equities market which has historically been driven by foreign portfolio investors,” he said.

Chioke said a strong positive correlation exists between the exchange rate and crude oil price in the country.


Forex restriction on 41 items


The CBN’s restriction of 41 items from accessing forex from official windows was one of such policies that also boosted forex stability. More than two years after the policy shift, its objectives, such as encouraging local production of the affected items and boosting local industries suffocated by the importation of competing products, are being realised.

The policy implementation was part of the home-grown solutions introduced by Emefiele to sustain forex market stability and ensure the efficient utilisation of available forex to grow critical segments of the economy.

The policy shot importers of the affected items out from buying foreign currency from the official window to pay overseas’ suppliers. Rather, they will have to source forex from the parallel market or the BDCs for their imports.

The CBN boss said the bank has been developing home-grown policies to surmount challenges that confronted the economy in recent times.

For instance, over the last 10 years, the CBN invested over N2 trillion in funding agriculture, SMEs and other manufacturers in the value-chain.

The regulator said the apex bank would continue to support operators in the agriculture, SMEs and manufacturing enterprises through its development finance initiatives, with a view to complementing the Federal Government’s efforts at diversifying the economy and ensuring self-sufficiency in food production.

Speaking on the 41 items, Emefiele said: “The issue of those 41 items, unfortunately, is one that has been on my table. But, I think it is important that in the life of an economy, there is the need for us to take a look and ask ourselves: what really are we importing into this country?

“When this thing started, we said: Why should we import rice? Why should we import toothpick? Why should we import palm oil? At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.

“So, there is the need for us to say at this time when there is scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”

Emefiele said that local producers of products on the import restriction list such as palm oil were made poorer for as longer as the importation of the product lasted.


He explained: “When we import rice, we impoverish the rice producers in Abakaliki, Kebbi, Sokoto, Katsina and other parts of the country. We need to look at that very seriously because God has blessed this country, with good climate, good weather, which should be taken advantage of. Since we can produce these things, let’s use them to feed our people so that we can save foreign exchange for the country.”

The CBN governor expressed satisfaction with the outcome of the policy, adding that more time was needed to evaluate its success. He said the policy could be reviewed after certifying that local manufacturers of the restricted items had become very competitive.

Emefiele clarified further: “My view would be that if you have forex, you should devote it for the import of items that are important and can’t be produced in the country.

“If you have excess forex, save it or create reserves. My view, which is the view of government, is that there are certain items that we can produce locally.


Measures to strengthen naira


Some of the measures put in place by the CBN to end the naira crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.

The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the Nigerian financial markets

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 party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.

FMDQ’s Managing Director/Chief Executive Officer Bola Onadele Koko said: “The Naira-Settled OTC Forex Futures product is a major milestone development in the evolution of the Nigerian financial markets. The Futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape.

“This innovation offers opportunities for government, businesses, pension fund administrators, investors and individuals among others to hedge (not speculate) to cope with exchange rate risk.

“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.”


Stakeholders proffer solution


Chioke pushed for the incorporation of a long-term diversified strategy in fiscal policy to cushion shocks in various segments of the economy.

To him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves. “To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.

Ezun also said: “There is a limit to how far a policy can support naira. Demand for dollar is huge because the economy is import dependent. A lot of industries still depend on importation of raw materials and finished goods making our import bills to go up.”

Association of Bureaux de Change Operators of Nigeria President Aminu Gwadabe said the country has not been able to build strong buffers to protect the economy against shocks as done in other climes.

He said: “The United Arab Emirates has over $400 billion in their reserves and that is a very big buffer for them as it protects their local currency at any given time and that is what I would want to see in Nigeria. Don’t forget that without the buffers, there is no way one can defend the local currency.”

“As a Nigerian, anytime I see the gap increasing, I’m worried and I say that this gap has to be reduced. The rising gap between both markets is fueled by compromise. Nigeria is an economy where you see compromise. Speculators are the biggest challenge facing the naira.

“Don’t forget that speculation is on its own a business. Once the CBN follows one road, they will find a way to frustrate the policy and ensure the survival of their business. But with increased transparency and liquidity, the activities of speculators will be reduced and volume of parallel market operators will also be reduced. We should move from the era of dollar allocation to think of how to bring in the dollars”.