More Steps to Boost FX Liquidity

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Thursday, April 13, 2017/ 12.30 PM / FBNQuest Research 

The interventions following the CBN’s circulars on fx in late February brought about a convergence between the interbank and parallel market rates; last month the naira on the parallel market appreciated by about 20% to a high of N365/US$. 

However, the gap is slowly widening again and has breached N400/US$. This widening suggests that there is still a supply shortfall of fx. Thus the CBN may well accelerate its interventions to narrow the divergence between the two rates, given that this was a key objective of the interventions that started two months ago. 

A recent circular from the CBN revealed that it has been selling at least US$80m per week to banks for onward sale to meet customers’ demand for invisibles; the circular set the banks’ selling rate at N360/US$. 

We understand that the CBN has also injected about US$2.7bn through forward transactions, mostly to importers. This is a positive for the manufacturing sector as most companies depend on a blended fx mix to secure their import needs.

Despite this increased fx supply, SMEs have been crowded out. In response, another circular (dated 10 April) announced sales by the CBN of US$20,000 per company per quarter. 

The Manufacturers Association of Nigeria suggests that sales within this special window should be 400% higher, at US$100,000. As it stands, the sales are not sufficient to meet the import requirements of most SMEs. 

Regardless of these developments, there is still a backlog of unmet demand. We note that fx demand has picked up considerably since the start of the CBN’s several interventions, particularly among institutional portfolio investors.

FX utilisation data from the largest provider of custody services in Nigeria show that c.US$4.5m is supplied weekly to these investors (along with some international banks). We believe that the backlog for this group is at least US$100m. 

A memo sent out by the CBN yesterday for fx dealers points towards another intervention for “invisibles”, which, we assume, covers other transactions like dividend repatriations that were not specifically included previously. 

These fx sourcing challenges are inextricably linked to the country’s economic challenges. An increased and sustainable supply would result in some respite and assist with stimulating economic activity. 

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