FX 'Whitelisting' Insufficient to Ease Pressures on Naira – Analysts

FX ‘Whitelisting’ Insufficient to Ease Pressures on Naira – Analysts

Following the apex bank’s decision to whitelist 43 items banned from accessing forex, analysts are saying boosting FX liquidity remains a core solution to reduce the exchange rate gap between official and parallel market rates.

Nigeria is currently struggling with foreign currency scarcity which has helped plunge the naira to a record low against the US dollar while demand for imports continues to ascend. Investment banking firms expressed positive views about the move, saying the reversal of foreign exchange restriction policy holds the potential to reduce demand pressure in the parallel market and curb speculative activity.

The speculative activity in the forex market has remained a downside to the naira’s survival, widening the gap between the official and parallel market rates. To encourage price discovery, transparency, and credibility of rates, the CBN further reaffirmed that the current FX prices should be referenced from platforms such as the CBN website, FMDQ, and other recognized or appointed trading systems. 

In their commentary notes, some investment banking analysts said while the apex bank’s decision to remove the restriction placed on 43 items is laudable, the move will achieve little to nothing without an immediate move to improve foreign currency supply in the official market.

The open market has witnessed a flood of forex demand as a result of importers’ and manufacturers’ inability to meet FX requests from the official window. This triggered an increase in exchange rate premiums across the Bureau de Change (BDCs) where the local currency has been freely traded between willing buyers and sellers.

Recall that the Central Bank of Nigeria (CBN) under the leadership of Mr. Godwin Emefiele had in 2015 blacklisted 43 items from accessing FX at the official window as part of FX management and import substitution strategies.

Ex CBN governor also stopped the supply of FX sales to BDCs operators, citing infractions including terrorism financing.

After unsuccessful policy testing that lasted for 8 years, the apex bank said in a statement it has now relaxed the policy that restricted access to forex by importers of these 43 items.

“,, the policy failed to deliver on its objective due to misalignment with market forces and the lack of synergy between the fiscal and monetary authorities leading to persistent decline in FX reserves and weakening Naira”, Afrinvest said in its commentary note.

Analysts at CSL Stockbrokers see the decision as a rational move but noted that it is still more like clearing the cobwebs.

“In our view, a major factor contributing to the existence of the wide premium between the official and parallel market rate is the distortion in the market that has resulted in more demand going to the parallel market”, the firm said.

“To our minds, this is a move to gradually improve confidence in the FX market, which has been weighed by long-dragging illiquidity and unorthodox policies”, CardinalStone said in its update.

A slew of analysts hope that the removal of FX restriction will reduce the gap between official and parallel market rates provided the CBN is ready to boost the supply side. 

Analysts at Cordros Capital said they expect the official exchange rate to depreciate towards the parallel market while the parallel market rate appreciates towards the official market such that the two rates find a new middle ground in the near term based on current FX liquidity conditions.

“However, when the market realises that FX supply is still minimal at the official market, importers will return to the parallel market to fulfil their FX obligations. The preceding will lead to another round of FX pressures in the parallel market”.

After a large devaluation of the naira in June, the inability to boost the supply side plunged the exchange rate at Investors’ and Exporters’ FX window lower.

Initially, exchange rates started to converge. Unfortunately, a log of FX demand could not be met such that demand pressure pushed the rate above N800 per United States dollar at a point.

Forex inflow into the market has been unimpressive due to the foreign currency backlog owed to foreign investors for repatriation. This resulted in fear of participating in the economy as major index providers continue to cite liquidity stress as a reason for downgrading Nigeria’s index.

In its latest circular, the CBN has however promised to make regular interventions in the market when needed and restated its pledge to clear the current FX backlog estimated at between $6.8 billion and $10 billion.  Reacting to this, analysts at CSL Stockbrokers said in a note that the CBN’s ability to intervene in the forex market depends a lot on the size of its reserves.

“In our opinion, the policy is well-intentioned as it aims to circumspectly improve market confidence, which has been derailed by illiquidity and legacy unorthodox policies. However, timing is a challenge given the current global context of capital flows which is unfavourable for emerging economies.

“Specifically, moderating inflation in developed markets supports the improved real rate of return, in contrast to emerging markets where FX volatility, high inflation, and political uncertainty compound investment risk”, Afrinvest said.

The firm said the success of the CBN’s decision to reverse the ban on 43 items depends on its ability to provide enough liquidity for the demand it will bring to the official window.

In the case of adequate liquidity, analysts at Afrinvest said they expect to see the parallel rate premium decline gradually in the short-to-medium term. However, in the opposite case, they foresee more pressure at both the official and parallel market windows.

Analysts at CardinalStone said they believe that the efficacy of the new policy is likely to be subject to the extent of improvement in FX supply at Investors’ and Exporters’ FX window.

“ a long-term approach to solving Nigeria’s FX quagmire is to contain oil theft, boost non-oil exports, and incentivise new cross-border investment in tech and other service-based sectors”, Afrinvest said.  

The firm advised that the CBN will need to roll out more complementary policies to attract the level of FX necessary to meet the policy objectives. It also recommends exhausting concessionary loan opportunities from bilateral/multilateral institutions to build an FX reserves wall chest. Analysts said they strongly advise exploring more oil-for-loan agreements to unlock liquidity.

“While we appreciate the need to eliminate the distortions in the market, we reiterate our view that the only viable solution to the current FX crisis is to boost the country’s foreign exchange revenues.

“As a first step to achieving this, the government should step up measures to reduce crude oil theft in order to enhance crude oil production.

“The swift start-up of the Dangote refinery, especially the export side of the business remains a game changer in our view as it will be a major source of foreign exchange into the country.

“We believe that more has to be done to promote the country’s exports, with the agriculture sector receiving priority in order to increase the production of many cash crops for exports”, CSL Stockbrokers stated.

Analysts said there must be a blueprint in place to explore the country’s huge untapped natural resources in order to increase foreign exchange receipts.  CSL Stockbrokers believes steps like these will attract foreign portfolio investments which could help stabilize the market in the interim.

“To improve FX supply, the CBN and fiscal authorities may have to evaluate the possibility of raising dollar facilities – via Diaspora bonds, Eurobonds or concessionary loans from bilateral/multilateral institutions-, asset sales (full or partial), among others.

“Curbing oil thefts, enhancing domestic oil production efficiency, and issuing new oil mining licenses are potential short-to-medium solutions”, CardinalStone said in its note. #FX ‘Whitelisting’ Insufficient to Ease Pressures on Naira – Analysts Investors Stake N653bn on Nigerian Sukuk -DMO