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…Fitch sees revised policy in favour of banks
The naira is stuck in the middle of a growing debate by experts trying to gauge the currency’s direction; few days after the Central Bank of Nigeria (CBN)’s dollar intervention jolted the foreign exchange market.
The naira was unchanged at N305.25 to the US dollar on Wednesday, at the official market, according to FMDQ data, while it appreciated 2 percent to N505/$ from N516/$ at the black market, traders said.
The black market naira had depreciated by nearly three percent this week, to N520 per dollar and 6.1 percent Year-To-Date, but has since reversed losses on the back of the Central Bank of Nigeria (CBN)’s dollar interventions.
“If the dollar supply improves, it will reduce the demand pressure in the market and the naira will appreciate,” said Pabina Yinkere, head of research at investment bank, Vetiva Capital.
“But there is a caveat,” Yinkere adds. “The apex bank will need to keep supply steady, and what will determine this will be oil prices and production.”
Oil prices leaped to $56 dollars per barrel as at 1pm on Wednesday Feb.22, while data backed by Ibe Kachikwu, the minister of state for oil, indicates that Nigeria’s oil production was near 2 million barrels a day as at last December.
Improving oil prices and production are duly reflected in the rate at which the external reserves have ballooned in the last two months, climbing to $29 billion as of Feb. 15, the highest level in 19 months, according to CBN data.
On the back of a benign oil outlook, Ayo Teriba, an economist and the CEO of Economic Associates, is optimistic that “the naira will appreciate strongly.”
“Keep your eyes on the oil price and production, as well as the external reserves, to gauge the direction the naira will go,” Teriba said by phone.
“The CBN will be able to sustain dollar supply if these indicators continue to rise and we are likely to have the gap between the official and black market narrow,” Teriba added.
Contrary to views that the naira is set to appreciate, Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham, thinks that until the parallel market rate appreciates to around N400/$ dollar we may never know what shape the naira will take in the short term.
“We need to see stronger appreciation but it won’t happen if traffic still finds its way to the parallel market ahead of the official one,” Ibrahim said, with the list of 41 items banned from assessing dollars officially in mind.
“The current rally in the black market naira may turn out a one-off in the end, like when it did after we floated the naira last June, before it deteriorated to where it is today,” Ibrahim added.
The policy was introduced in August 2015 to manage dollar demand amid dried-up dollar inflows and comprises tooth-picks and steel rods.
Nigeria’s dollar supply has been strangled by foreign currency restraints and low exports of crude oil. The government devalued the naira last June but still kept it at just over 300 to the dollar – as much as 40 percent stronger than black market rates in the following months.
The bank’s dollar management strategy attracted widespread criticism but it finally eased restrictions on Monday, Feb.20.
With restrictions eased, it will help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy, according to ratings agency, Fitch.
“The CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations,” Fitch said on Wednesday.
These obligations are primarily trade finance obligations owed to correspondent banks, Fitch observed.
“In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy,” Fitch added.
While some the analysts polled in a BusinessDay survey commended the adjustments made to the foreign exchange policy, Winston Osuchukwu, managing director at First Ally Asset Management is having none of it.
“Given that the Federal Executive Council (FEC) called for it two weeks ago and it has happened this week, questions if there was any long term strategy to manage this entire process,” Osuchukwu said in an interview on CNBC Africa.
“We have also acknowledged that what we had before was not working, yet all we do is adjust the levels at which we were doing the same thing. That doesn’t work,” Osuchukwu added.
He also criticised the fact that the new policy suggests that the CBN would no longer give dollar priority to manufacturers, having pulled down the 60:40 dollar sales principle which hitherto mandated commercial banks to sell 60 percent of their dollar stock to manufacturers.
“When you lump people who need travel or school allowance together with manufacturers who need to import critical raw materials and say they will all get at equal rates, it is like subsidising the rich who can afford to send their children to school or travel out for vacation, at the detriment of the productive sector. We should not do this,” Osuchukwu added.
The manufacturing sector has contracted every quarter since the first quarter of 2015 and contributed 8.59 percent to total GDP in the third quarter of 2016, according to NBS data.
The CBN announced a $500 million intervention in the FX market, using Non-Deliverable Forward (NDF) contracts and stepped up dollar sales on the interbank currency market on Tuesday, a day after it began providing direct additional funding to banks to meet the FX needs of Nigerians for personal and business travel, medical needs, and school fees.
Fitch commended the CBN’s intention to increase intervention in the FX interbank market to increase supply of foreign exchange and the reduction of the maximum waiting times for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180.
Banks bought $216.5 million in one-month forwards, and $154.3 million in two-month forwards, according to the Abuja-based bank, suggesting the sale over satisfied demand by $129 million.
The CBN also sold a total of $6 million to commercial banks at N304.75 per dollar, FMDQ data showed, four times more than its regular $1.5 million.
