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New FX Market in Need of Additional Supply

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Friday, July 29, 2016 9:55am/ FBNQuest Research 


 The liberalisation of the exchange-rate regime on 20 June remains work in progress. The new unified rate opened at N280 per US dollar and was broadly stable until 16 July, when the CBN started to reduce its daily supply to the market. Because it is the predominant supplier, its rate has since weakened and closed yesterday at N311.35.  

In order to attract offshore portfolio investors (a core element of autonomous fx sources), the monetary policy committee this week hiked the policy rate by 200bps to 14.00%. Our take is that it will have to tighten further. 

The historic data in the chart shows a 39% y/y decline in CBN inflows to US$1.51bn in May 2016. For aggregate inflows (including autonomous sources), there was a smaller fall of 28% y/y over the same period to US$3.93bn.


Pressures on the domestic oil industry were disproportionately painful therefore for CBN inflows. The price of Bonny Light averaged US$65.1/b in May 2015, and US$47.6/b one year later. Production slumped from 2.05 mbpd in May 2015 to 1.70 mbpd or lower.


The non-oil sector accounted for US$1.06bn of total autonomous inflows of US$2.42bn in May 2016. The share of non-oil exports was just US$173m.


CBN outflows amounted to US$1.71bn. We all know that they did not satisfy demand because the CBN was rationing fx to contain the depletion of official reserves. When it launched the new regime on 20 June, it entered into spot and, mostly, forward contracts of close to US$4.0bn, which, it maintained, would clear the backlog accumulated since the beginning of the year.




The dramatic increase in inflows in July 2015 is explained by one-off receipts from the domiciliary accounts of ministries, departments and agencies.

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