CBN Rolls the Dice to Tackle Market Liquidity and Dollar Dearth

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Thursday, December 10, 2020 / 06:02 PM / by FDC Ltd / Header Image Credit: Channels TV


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The CBN has issued series of circulars from special bills to new regulations for Diaspora remittances. These new policies triggered a quick appreciation of the naira from N500/$ to N470/$ at the parallel market on December 3. The naira had lost over 30% YTD due to limited forex inflows and heightened forex demand.

 

Regulations for Diaspora Remittances

The CBN through a circular released on December 2 announced that beneficiaries of Diaspora remittances can now receive funds in foreign currency or directly into their domiciliary accounts. The aim was to boost and facilitate the efficient flow of remittances into the country from Nigerians in Diaspora. According to the CBN governor, these amendments are a result of an internal review of the operations of International Money Transfer Operators (IMTO) in the country (Western Union, MoneyGram and RIA Money Transfer) and the potential impact of improved inflows on the economy. Remittance inflows into Nigeria fell by about 40% in Q2'20 partly due to restrictions on the use of dollars by beneficiaries and the widening gap between the parallel market and official rates.

 

Analysis

This decision by the CBN will encourage remittance inflows through official channels and possibly reduce forex smuggling and arbitrage practices in the country significantly. In addition, some analysts describe it as a game changer as it could help address the imploding problems of forex scarcity and the widening balance of trade deficit. In its latest foreign trade statistics report the NBS stated that the country's trade deficit expanded by N2.39trn in Q3'20.

 

Implications

A possible increase in forex supply will boost the CBN's ability to support the currency and clear its forex demand backlog. The naira could appreciate against a basket of other currencies, particularly the US dollar. This coupled with the AfCFTA and possible reopening of the land borders could reduce imported inflation significantly and further taper prices of finished food imports/ commodity prices.

 

CBN Special Bills

On the same day (December 2), the CBN issued another circular where it introduced special bills as an additional tool for liquidity management and also to deepen the financial markets.

 

The features of the CBN Special Bills are as follows:

  1. Tenor of 90 days;
  2. Zero coupon, applicable yield at issuance will be determined by the CBN;
  3. The instrument will be tradable amongst banks, retail and institutional investors;
  4. The instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window; and
  5. The instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.

 

Analysis

This means that the excess cash reserve requirements of banks will be refunded through a 90-day instrument to be priced as a zero coupon bill and the yield will be determined by the CBN. Banks can trade the bills, which also qualifies as liquid assets on their balance sheets. The aim is to allow banks exchange cash for an interest bearing instrument and also reduce the negative effect on their earnings.

 

Implication

This could increase interbank borrowing as banks scramble for cash to meet consumer demand. In addition, another instrument as a "replacement for cash" would help mop up market liquidity, which could be a signal that interest rates may start to increase. It could also taper inflationary pressures.


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