A Sharp Fall in the CBN's Supply of FX

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Wednesday, August 11, 2021 / 10:55 AM / by FBNQuest Research / Header Image Credit: Newsrand


FX flows through the CBN give a reasonable sense of foreign-exchange availability and administrative changes in the market by the central bank. Data for January 2021 show inflows of USD1.73bn and outflows of USD2.83bn. The point of interest is not the net deficit, which is common, but the scale of flows. To illustrate both points, the inflows and outflows in January 2020 (before the COVID-19 pandemic) were USD5.16bn and USD6.65bn respectively. The outflows have fallen because the inflows are far lower: the CBN has little opportunity to purchase fx and mop up the proceeds of (much reduced) foreign portfolio investment (FPI).


Other CBN inflows of scale include one side of institutional and interbank swaps, receipts for the treasury single account (TSA) and third parties, unutilized funds from fx transactions, and income from CBN/FGN investments.

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The CBN outflows are principally external debt service payments, transfers on behalf of ministries, departments and agencies (MDAs), and, largest of all, interbank utilization.


The last is the variable item in the outflows. The CBN supply to different end-users changes with fx availability. It decreases because the CBN has less fx to distribute (and because demand has declined due to economic conditions).


An important administrative change since early 2020 has been the CBN's policy on sales to bureaux de change (BdeC). It halted these sales when land and air borders were closed in mid-2020 because of the pandemic. (For close to five months last year it also did not supply the I&E/NAFEX window.)


The CBN has again stopped sales to the BdeC and directed the deposit money banks to take up the role in lieu. The official expectation is that this will create a more liquid fx market for retail.


The experience of January 2016, when sales to BdeC were also halted, tells us to have an open mind on the outcome.


For total flows through the economy, of course, we have to add autonomous transactions. These generally produce a substantial net inflow although its scale has diminished with the sharp decline in FPI since the pandemic. The other category of sizeable inflows are transfers to ordinary domiciliary accounts.


Autonomous sources produced inflows of USD3.74bn and outflows of USD140m in January. In aggregate (CBN and autonomous combined), there was a net inflow of USD2.50bn through the economy.


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