Pressure on the naira eased on a large scale at the parallel market last week as the currency firmed by 12 percent within four days from an all-time high of N522 to the dollar to N460 and the trend is expected to continue this week.
The positive movement of the naira is an effect of the new foreign exchange policy of the Central Bank of Nigeria (CBN) which allows more dollar inflow to the system through banks. The new policy seeks to achieve the following: separate invisibles (services) from tradables (physical goods), remove the 60:40 allocation rules, reduce the average tenor of forward transactions from 180 to 60 days and increase supply as a whole to the market.
Following the announcement on Monday, the naira began a gaining streak on Tuesday as the CBN began to flood the market with dollars offering up to $500 million of which banks were able to take up $370.9 million.
The success of the CBN’s aggressive intervention and moderation in demand in the unofficial market led the Naira to post its biggest one-week rally in more than three years in the parallel market, appreciating from a trough of N522 to the dollar (pre-announcement) to a three-month high of N460 to the dollar (post announcement) as speculators with short Naira positions sold off.
The devaluation of the naira had impacted the Nigerian economy as inflation rose 12 consecutive times over the last year from 9.6 per cent to 18.7 per cent in January. This was due to the fact that the country is import dependent. Also the various restrictions at the official end of the foreign exchange market had put more pressure on the naira at the parallel market where many sought dollars.
Many Nigerians with wards abroad found it difficult to pay for school and upkeep and forex for business and personal travel allowances were mostly sought from the parallel market as banks gave priority to manufacturing and raw material demand based on the 60:40 rule.
The recent steps by the CBN to ease the liquidity pressure faced by the country’s banking industry are to many, the best measures that would drive the sector to speedy recovery and financial stability, while for others, it is a plan to normalise the FX interbank market for actual growth.
In whatever way it is scaled, one major indicator that gives joy to market watchers is the fact that recent evidence has shown that the CBN is winning the war against the dare-devil – parallel market that undermined previous efforts of the apex bank aimed at stabilising the price of the U.S. dollar to the Nigerian naira.
The parallel market took a more disturbing advantage of the scarcity of dollar in the forex market very recently and jacked up the price of a $1to N520, a situation that drew the ire of all stakeholders to a public debate. Obviously, it was only expedient for the monetary authority to move fast, wet the forex market and put an end to the sabotage against its efforts.
In line with its determination to increase the availability of Foreign Exchange in order to ease the difficulties encountered by Nigerians in obtaining funds for Foreign Exchange transactions, the CBN aptly directed an additional funding to banks to meet the needs of Nigerians for Personal and Business Travel, Medical needs, and School fees, effective immediately.
The intention is to among other things clear the backlog of overdue foreign currency obligations owed by banks to international creditors and provide enough dollars to all Nigerians.
In order to further increase the availability of foreign exchange to all end-users, the CBN announced that it will significantly reduce the tenor of its forward sales from the current maximum cycle of 180 days, to no more than 60 days from the date of transaction, a move, Fitch Ratings, a leading global rating agency says would help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy.
That is not all. Fulfilling its promise to ease the difficulties encountered by Nigerians in obtaining funds for Foreign Exchange transactions, the Central bank last Tuesday carried out wholesale interventions in the interbank FOREX market by providing a total sum of $370,810,810.79 to 23 banks to meet the visible and inviable requests of their respective customers.
The qualified bids for the U.S dollars ranged from N315 to N360. About eight banks had received full allotments of their respective bids valued at $37,500,000 each, while others got delivery of allotments of between $46, 512.50 and $15,578,081.51.
Beyond the marginal supply of dollars to the forex market, the CBN has also taken commendable steps to maintain confidence in the FX market. As a matter of fact, the CBN has begun the process of implementing its articulated program to clear all the unfilled orders in the interbank FX market with a promise to meet all unfilled orders.
A top management staff with one of the banks benefiting from the CBN’s $370,810,810.79 wholesale intervention told LEADERSHIP that the bank’s initiative is a major boost for the bank, pointing to the fact that access to foreign currency liquidity has been tight and banks generally have struggled to meet foreign currency obligations to their customers.
Like Fitch which expressed confidence that the new CBN plan will also make it easier for individuals and business customers to meet their foreign currency travel and other personal needs because it will sell foreign currency to banks at a rate not exceeding 20 per cent over the interbank (official) rate for these purposes. Former president, Finance House Association of Nigeria, Eddie Osarenkhoe said the positive market response to the action of the CBN indicates that, “that is the way to go.”
To analysts at Fitch and Cowry Assets Management Limited, the new policy which ensures the provision of forex for payment of school fees, travel and medical expenses will ease the foreign currency liquidity pressure faced by banks in the country.
The pressure on the naira is also being reduced as those who would have sourced dollars from the parallel market are now being accommodated at the official end of the market. The CBN had on Tuesday offered $500 million for sale but had sold $370 million as banks ran out of naira to buy up the dollar sales.
Analysts at Cowry Assets said they “anticipate that the new measures could pave the way for a gradual return of confidence in the foreign exchange market. We also expect the monetary authority to do more to harmonize the exchange rates and thereby discourage arbitraging.”