FX Inflows Climbs to $2.2 Billion Following Banks Compliance With CBN Policy

It has been reported that FX inflows at the Nigerian Autonomous Foreign Exchange Market (NAFEM) increased by 66.7% last week to settle at $2.2 billion after local commercial banks followed the directives issued to them by the Central Bank of Nigeria.

However, more than the impressive result recorded last week is needed to strengthen the country's currency, as the value of the naira still witnessed a decline of 2.3%.

Last week, the Central Bank of Nigeria (CBN) released different circulars with various guidelines with new macroprudential limits for net open positions and also removing some restrictions on International Money Transfer Operators' (IMTOs) exchange rate quotes as part of its ongoing efforts to improve liquidity and cushion volatility in the FX market.

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Due to the efforts of the CBN directives that were acted upon by banks around the country, the inflow of dollars at the NAFEM window, also called the Investors and Exporters (I&E) window, increased to $2.2 billion.

The naira at the I&E window fell by 2.3% to close for the trading week at N1,469.97/$, with trade carried out between N830 and N1,550/$ at the official window.

The naira also lost value at the parallel market to sell for N1,470/$, representing an 8.2% decline in the local currency traded against the dollar last week.

Following this, there have been some reactions from analysts at Cordros Research, which say that the FX supply at the I&E window was because commercial banks complied with the new macroprudential limit for net open positions along with the apex bank removing restrictions on IMTOs exchange rate quotes as well as interbank forex deal spreads and interbank sale of proceeds.  

According to the analysts, they expect more pressure on the local currency to continue as the CBN updates its policy on limiting banks' foreign currency exposure, which will continue to strengthen the turnover in the NAFEM and improve supply to the market over the short term.

They said,

  • Also, with significant gains made regarding addressing the forex backlog, the potential for a more stable forex market seems possible. However, we do not expect to see meaningful appreciation of the currency until the apex authority ensures the backlog is completely cleared, policy actions are further aligned to be frictionless, the frictionless policy actions are sustained, and it builds capacity to intervene within the market to limit volatility during periods of pressure.

While analysts from Afrinvest West Africa said,

  • CBN governor might be looking at the wrong side of the spectrum in emphasising dollar demand for services and imports as the root cause of the declining naira, given that demand for services and imports would always exist if not readily available.

  • Many of these travellers eventually morph into diaspora workers who remit forex back into the country as remittance remains the most resilient source of forex inflows. Therefore, blaming the current forex crisis on demand-pull factors might distract from tackling the issues affecting supply.

  • The CBN should instead focus on reforms that would restore confidence in the market and boost major forex inflow channels. In light of this, we applaud the CBN's continued work to clear verifiable forex backlogs, as it is a much-needed step in the right direction to restore confidence in the market.

  • Also, the narrowing of the negative real rate of return, as evidenced by the upward repricing of yields at the recent NT-Bills auction, is commendable. However, we reiterate that closer coordination with the fiscal leg is needed to curb excess liquidity, given that the money supply grew 510 per cent to N78.7 trillion at the end of 2023.

Back Story

In January this year, the Central Bank of Nigeria imposed a limit on how much local banks held in foreign currencies. The apex bank expressed concern over the increase of forex exposures on its balance sheet following the naira and dollar crisis, which has plunged the naira into a risky state.

The CBN stated that it recently introduced a limit on lenders' net open positions of 20% of shareholders' funds for short positions and a zero limit for long positions and ordered banks to harmonise reporting, according to a circular released.

Before the CBN restrictions, local banks were not allowed to have open positions on the dollar, which meant they could not buy foreign exchange with their account from the market or speculate on the currency's value.

The CBN said the excess net open dollar positions on banks' balance sheets have incentivised lenders to hold foreign currency, exposing them to currency and other risks.

Now, banks must immediately bring their exposures within the set limits or face sanctions, including suspension from the currency market.

The central bank stated that lenders must have liquid foreign assets to cover maturing foreign currency obligations and asked banks to have a foreign exchange contingency funding arrangement with other institutions.

Banks will require approval for the early repayment of their Eurobonds, where such redemption clauses are applicable.

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