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The Entrails of The CBN’s FX Supply

Forex	2011 VIEWS
Forex
2011 VIEWS

Friday, December 07, 2018 10:20 AM /FBNQuest Research

On Wednesday we commented on a quarterly data series for aggregate fx flows through the CBN, supplemented by figures for other (autonomous) channels. Today we turn to another series on the destination of the CBN’s fx supply.

The largest, surprisingly, is payment(s) on the maturity of forward fx contracts. The second largest is the CBN’s supply to NAFEX (investors’ and exporters’ window). As the sentiment of foreign portfolio investors has started to turn for reasons we have often given, so the CBN has become a seller (supplier) of fx at the window.

This data series highlights the point that the CBN, being wary of what we call free market forces, operates a complicated foreign-exchange regime.

The CBN’s swap transactions attract much commentary, sometimes of a conspiratorial nature, because they are not covered by the data for gross official reserves. This series, as one other in the CBN’s separate Quarterly Statistical Bulletin, provides some welcome colour. Many other central banks enter into swaps, and they do not all share the details in public fora.

The quarterly allocation to bureaux de change (BdC) is on a relative scale that has few, if any parallels, in the EM universe. It has since been increased by additional sales to the BdC for the Christmas season. The CBN’s supply has varied greatly under different fx regimes, and it has previously queried the rationale for an allocation to BdC per se.

Destination of fx supply by the CBN, Q3 2018 (% shares) Total: US$11.88bn

Proshare Nigeria Pvt. Ltd.

Sources: CBN; FBNQuest Capital Research

We see this data as providing a useful snapshot of transactions in Q3 2018. The series is subject to substantial revisions so we are not looking for long-term trends. For example, the previous report showed total supply in Q2 2018 at US$6.40bn (now US$7.89bn), sales to BdC at US$270m (US$1.50bn) and forward sales at maturity at US$2.92bn (US$3.24bn). We acknowledge that the collection and reconciliation of this data is particularly challenging.