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Multiplier Effects Of CBN’s Foreign Exchange Intervention



By Kayode Tokede, Lagos

The Central Bank of Nigeria (CBN) since last year has continued to intervene in the foreign exchange market following challenges posed by the level of depletion of the country’s reserves, arising from issues such as a drastic reduction in oil earnings, speculative trading most especially at the parallel market.

The CBN’s total supply was $1.2 billion and it was sustained twice to three times per week to Bureaux De Change (BDC) operators in April while cumulative supply since February 20, 2017 was put around $3.61 billion. Finance experts and CBN had predicted that the nation’s economy can only be out of recession with improved oil production and foreign exchange liquidity.

Wisely, the CBN has sustained its intervention with introduction of twice weekly foreign exchange sales to BDCs operators and financial institutions with creation of new special foreign exchange window dedicated to investors, exporters and end users.

The window will specifically serve eligible transactions that are classified as invincible in nature as well as transactions for Bills of Collection. Unlike the window for Personal Travel Allowance, Basic Transport Allowance, Manufacturers, Airlines this window does not have a fixed peg. The market will determine the price at which buyers and sellers want to transact.

The apex banking in April also introduced another policy measure, stating that it has opened a special foreign exchange window for small and medium scale enterprises (SMEs). This, according to the CBN, would enable small and medium-sized businesses import eligible finished and semi-finished items, not exceeding $20,000 per operator each quarter.

With all these measures, the naira last week was trading at N388 to the dollar, while the pound sterling and the Euro closed at N495 and N425 respectively. The CBN amid pressure to narrow the gap between the official and parallel market rates, has devalued the naira for consumers, offering to sell them foreign exchange at about half the premium the parallel market charges.

It has also increased dollar sales in recent weeks to importers to try to boost the naira. According to experts, the prompt foreign exchange intervention by CBN has created jobs, improved on production, stable stand for the naira and further reduction in inflation rate. These will further signpost the gradual recovery of the economy from recession.

Inflation rate bucked the trend in March to fall to 17.26 per cent, its lowest level in eight months, driven by a slower rise in general price levels, the National Bureau of Statistics (NBS) said. Inflation had risen to 18.72 per cent in January, its 12th monthly rise and its highest level in more than 11 years.

However, CBN in its Purchasing Manager’s Index for the month of April reported 51.1 index points in April 2017, indicating expansion in the manufacturing sector after three months of contraction. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. It implies that the PMI has dropped by 3.4 index points to 47.7 index points in March 2017

According to the CBN, the Manufacturing PMI for the month of April 2017 shows recovery, production level growing faster; new orders and raw materials inventories growing from contraction; employment level is declining at a slower rate; while supplier delivery time is struggling to catch up.

With  the drop in inflation rate ( which is expected to drop further to 16.8 per cent as predicted by experts), increase in production, the nation is expected to move out of recession amid interventions of CBN in the foreign exchange market. It will be recalled that the nation’s Gross Domestic Product (GDP) contracted in 2016 at negative 1.5 per cent in 2016, the first full-year contraction since 1991.

The CBN, Governor, Mr. Godwin Emefiele, had expressed optimism that the present economic recession in the country would end by the end of June or latest by the third quarter of this year based on positive economic indicators. He said indicators is the downward trend in the parallel market as regards the value of naira against the dollar which has appreciated from as high as N525/$ to between N370 and N380 currently.

He listed other indicators to include reduction in the rate of inflation by the NBS, and the country’s foreign reserve that had also risen from over $27 billion at the beginning of the recession in June last year to $31 billion.

The acting director, corporate communication, CBN, Mr. Isaac Okorafor at the recent bankers committee meeting in Lagos said foreign exchange was among contributing factors for recession in 2016. He said, “foreign exchange crunch limited production last year. Oil flow was disrupted because of the Niger-Delta militancy and of course, the prices of oil dropped drastically.

“The question is how are these factors behaving now? There has been stability in the foreign exchange market and Niger-Delta region of the country. The price of global oil price has stabilized but not as we wanted it in the international market and we have significantly eased the problems of manufacturers and SMEs in the foreign exchange market.

“The CBN has eased off fraudulent demands and most importantly agriculture production has greatly improved attributable to the CBN’s Anchor Borrowers’ Programme and some others. The collective action of all these factors point to a direction of greater growth.  Inflation has continued to drop and we believe that the nation’s economy is certainly on its way out of recession” he added.

Speaking to LEADERSHIP, managing director, Cowry Assets Management Limited, Mr. Johnson Chukwu said the Exporters/Investors Window trading horizontally at N379/$ has contributed to foreign exchange and the positive effect spreads across the money and capital markets.

He said, “liquidity has continued to improve with nearly all the critical sectors of the nation depending on it. We have seen improvement in the PMI given improve access to foreign exchange. We have seen improvement in consumers goods based on improved funds in the system.

“The improved intervention has affected basically as the aspect of the nation’s economy including creating more jobs, consumption and productivity. The lack of liquidity last year had contributed to negative GDP   and with that corrected now, we should be out of recession soon.”

Chief executive officer at Enterprise Stockbrokers Plc, Rotimi Fakayejo explained that the uncertainty in the foreign exchange market has dropped attributable to CBN’s measures. “there has been good  supply of funds In the economy with little contribution from foreign investors. Everybody is still skeptical about stable exchange rate.

There were speculation that it will get to N500/$ but with the CBN’s intervention,  and consistency, I believe  that with Oil production level maintained, CBN should be able to maintain foreign exchange intervention.

“To a great extent, the intervention is affecting inflow into the equities market.  CBN is collapsing the rates and by the time we have two rates, we begin to see more positive impact on the economy. Now that the fiscal policy has come on board, we are going to see major impact of what the CBN has done vis-à-vis the exchange rate.

“Attraction of foreign direct investment will definitely lead to job creation. Industry been able to procure raw materials will enhance production and make people to keep their jobs,” he explained.




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