FX Policy: Nigeria Faces Credibility Issues -CEO
Tolu Osinibi, Chief Executive of FSDH Capital said there are still some credibility issues regarding whether foreign portfolio investors will trust any change in foreign exchange (FX) policy that’s introduced before the new administration takes over at the end of May 2023.
The apex bank’s tight foreign exchange management has pushed away foreign investors from the local economy. This has created a scarcity of foreign currencies in Nigeria and the local rate has worsened further.
Struggling to keep the supply side strong, the apex bank maintained market intervention, but the record showed inconsistency in its retail auction sales.
MarketForces Africa gathered that apart from increased lost bids at retail auctions, the Central Bank of Nigeria (CBN) has also been delaying the settlement of its FX sales at the retail auctions.
This signals there is pressure on forex management. Nigeria’s monetary authority has been micromanaging its exchange rate amidst the scarcity of foreign currencies in the local economy. The economy has suffered from low US dollar inflows while FX backlog continues to rise.
For the local economy, depreciation of the naira could worsen key macroeconomic indices, analysts told MarketForces Africa. It will most likely have a run on headline inflation and unemployment.
The Nigerian local currency, the naira, has continued to face pressures from rising demand for the United States dollar and other foreign currencies.
Last year, the Nigerian naira lost 10% of its opening market rate at the Central Bank of Nigeria’s (CBN) investors’ and exporters’ foreign exchange market.
Naira’s weakening in the FX window impacted a number of businesses that depend on imports for further production in the local economy.
Unfavourable FX rate, according to separate results posted on Nigerian Exchange, resulted in large exchange rate losses for manufacturers, pharmaceutical, and Brewery companies among others.
Across foreign exchange markets, the naira is not racing against the greenback on a strong footing. Its unfavourable position, for local and international transactions, stems from weak macroeconomic indicators and recent policy somersault.
Nigeria’s failed naira redesign implementation stoked pressures that support consumer price index upticks. The scarcity of the naira experience in the first quarter worsened the inflation outlook.
The Nigerian naira inflation exposures dragged the exchange rate at the Investors and Exporters window above N463 to a United States dollar while rates hover within N740-N760 at the open market.
A slew of foreign currency analysts across Broadstreet believes that the Nigerian naira is overvalued. By consensus, analysts have indicated a need to adjust the exchange rate to its fair value.
The CBN has switched to rationing FX following declining external reserves at a time when foreign investors’ appetite across the market stays dry – over confusing exchange rate management.
Business and Personal Travelling allowance to Nigerians were cut by half, according to deposit money banks in separate emails to customers, informing them they also need 60-day notice for processing.
In a chat with MarketForces Africa, FSDH Capital Osinibi, said CBN reduced the supply of FX to Invisibles, by about half, due to the low level of its reserves.
Gross external reserves would be lowered after you factor in outstanding Forwards, Swaps, Eurobond redemption, etc., according to FSDH Capital Chief Executive. According to him, the CBN has also been delaying the settlement of its FX sales at the retail auctions.
“The sustainable solution is to adjust the FX rate -allow some depreciation- in order to be able to attract real FX flows into the system.
“There are still some credibility issues regarding whether foreign portfolio investors will trust any change in FX policy that’s introduced before the new Administration takes over at the end of May 2023”.
“Also, keep in mind that US$35 billion is gross reserves. We have no idea what the net reserves position is, that is after adjusting for all binding commitments, including Forwards sold, Swaps that have to be unwound, etc.”.
On crude production volume, FSDH Capital boss said, “We have no idea of the percentage of the quoted 1.3 million barrels per day that’s already been presold ages ago in Forward sales.
“Definitely a significant portion; so, we’ve already collected and spent a very big chunk of the money… any positive difference between the current price and the forward price is ultimately to Nigeria’s benefit.
“In any case, a very big chunk of the money was collected and spent ages ago and we’re simply meeting crude delivery obligations”.
In summary, the situation is a supply-side problem that’s being tackled from the demand side; while this may seem to work in the interim, it’s not sustainable, Osinibi told MarketForces Africa. #FX Policy: Nigeria Faces Credibility Issues -CEO Naira Steadies as Banks Issue Update on FX Purchase
