Two weeks after the Central Bank of Nigeria (CBN) announced the unification of all segments of the forex market, the initial excitement that greeted the move in financial circles appears to be wearing off as key investors are citing negative real yields for their reluctance to bring funds back to the country, writes Tony Chukwunyem
On June 14, when the Central Bank of Nigeria (CBN) announced via a press statement signed by its Director, Financial Markets, Angela Sere-Ejembi, that all segments of the foreign exchange market had been collapsed into the Investors and Exporters’ (I&E) window and that it had introduced the “willing buyer, willing seller” model at the I&E window, the reaction of analysts and investors both at home and abroad was overwhelmingly positive even though the development resulted in a weakening of the naira.
In fact, the CBN followed up the new measures with another circular on further changes to the forex market. Key directives in the circular include the eligibility of all visible and invisible transactions for the I&E window, unrestricted access to funds in ordinary domiciliary accounts by account holders, reducing cash withdrawal and lifting transfer restrictions to allow amounts not exceeding $10,000 per day or its equivalent via telegraphic transfer.
The directives also included the elimination of the restriction of cash deposits into domiciliary accounts, orderly settlement of any committed FX forward transactions by the apex bank and normalization of the regulator’s Cash Reserve Ratio (CRR) maintenance processes to ensure equity in its implementation across the banking industry.
Commendation
According to financial experts, given that the changes to the forex market came on the heels of President Bola Tinubu’s decision to remove the wasteful and costly fuel subsidy, indicated that Nigeria’s new government was prepared to tackle two key issues that had hindered the country’s economic growth and development in the last eight years.
Commenting on the exchange rates unification, for instance, the International Monetary Fund’s (IMF) Representative in Nigeria, Mr Ari Aisen, noted that the development had been one of the Fund’s longstanding recommendations to Nigeria and that it was ready to provide technical assistance to enable the policy to succeed.
Ari stated: “The Fund greatly welcomes the authorities’ decision to introduce a unified market- reflective exchange rate regime in line with our long-standing recommendations. We stand ready to support the new administration in its implementation of FX reforms.” Similarly, the immediate past President of the World Bank, David Malpass, commended President Tinubu for his administration’s reforms in the nation’s foreign exchange market and the abolition of the fuel subsidy regime.
He said the actions are expected to enhance currency stability, com- bat inflation, and tackle corruption in Africa’s most populous nation. “Glad to see @officialABAT tak- ing concrete steps to scrap Nigeria’s harmful government subsidies and multiple exchange rates. “These are important steps toward currency stability, lower inflation, and reduced corruption in Africa’s most populous country,” Malpass tweeted.
Benefits
Apart from the Bretton Woods institutions and other international financial institutions’ support for the reforms, local investment banks were also excited about the measures, which they noted, would bring a lot of benefits to Nigeria’s economy.
On the unification of the exchange rates, for instance, analysts at CardinalStone Research said that the policy will increase the attractiveness of Nigeria’s export goods in international markets as well as improve the outlook for its Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI).
The analysts said: “On the ex- port front, we expect the naira unification, which also implies an effective devaluation to us, to increase the naira equivalent of Nigeria’s export proceeds. “The weaker currency will also increase the attractiveness of Nigeria’s export goods in international markets, cascading to greater demand from consuming nations barring responses from competitor countries to retain market share.
We, however, note that there is likely to be an offsetting impact from the cost of imports.” They further stated: “Elsewhere, the pro-market initiatives have materially improved the outlook for FPI and FDI in Nigeria.
To this point, we recall that in 2017, following the introduction of the I&E window, FPI inflows surged by 304.3 per cent YoY to $7.3 billion, while the contraction in FDI slowed to -6.0% YoY (vs -68.9% YoY in the preceding year). Cumulatively, capital importation into Nigeria ballooned from $5.1 billion in 2016 to $12.2 billion in 2017, while the stock market rallied by over 42.0 per cent YoY, with foreign participation at 47.5 percent (vs 45.0% in 2016).
“Now, Nigeria has opted for a complete bouquet of pro-market initiatives that commenced with the removal of subsidy on May 29, 2023, to the recent decision to allow the naira to trade more freely. Given this, we see latitude for a similar surge in FPI from the multi-year lows of $5.3 billion in 2022. However, a material inflow of patient capital may take a little longer, subject to complementary improvements in fiscal and other policy environments.”
In addition, the analysts said: “The market policy appears to have excited markets in line with expectations and the reality of attractive naira asset valuations. In the last two days, the equities market has posted a cumulative return of 7.3 per cent, while the Nigerian 10-year Eurobond returned 5.4 per cent over the same period.”
Also, in their reaction, analysts at CSL Stockbrokers projected that the reforms would boost banks’ fee and transaction income even though, according to them, the extent of the benefits that banks and domiciliary account holders would derive from the new directives would be dependent on the availability of foreign exchange.
They also noted that the apex bank’s decision to normalise its CRR maintenance processes in order to ensure equity in its implementation across the banking industry as part of the new forex regime would result in lenders having more funds earning real income.
As the analysts put it, “for a long time, domiciliary account holders faced many restrictions ranging from stringent withdrawal limits to the inability to transfer FX across dorm accounts in different banks to the imposition of ridiculous spending limits and restrictions on the amount that can be deposited into domiciliary accounts.
Lifting these restrictions is a breather for holders of such accounts and should facilitate easy movement of FX and consequently liquidity. “Besides the benefits for owners of domiciliary accounts, lifting or reducing the restrictions around FX deposits, withdrawals and transfers bode well for the bank’s fee and transaction income.
However, we note that the extent of these gains will be dependent on the availability of FX. Removing spending limits and increasing withdrawal limits without sufficient FX liquidity will not amount to much. “Again, many banks have effective CRR significantly above the stipulated 32.5 per cent.
Ensuring that all banks are within the required limits, means either re- leasing funds or ceasing to debit the banks till they fall short of the required 32.5 per cent. “This, in our view, is good news for the banks as they will have more funds earning real income.
The incessant and discretionary debits of banks’ deposits previously not only restricted interest income growth but also sometimes created liquidity problems for many banks.”
Negative real yield
However, last Thursday, Bloomberg reported fund managers and analysts as saying that Nigeria would need to allow interest rates on naira bonds to at least double to make them attractive enough for foreign investors to buy and bring in the dollars needed to support its foreign exchange reforms.
According to the news agency, London-based portfolio manager at Abrdn Investments Ltd, Kevin Daly, stated that with the CBN selling one-year treasury bills recently at a yield of 8.2 per cent, which is less than half headline inflation of 22.4 percent in May and the monetary policy rate of 18.5 per cent, it implies a negative real yield on the notes that will put off foreign investors.
Daly was also quoted as saying that Abrdn, “would be interested in bringing money back onshore if rates adjust higher in the range of 15-20 per cent, and the naira settles around the 750 a dollar area.”
Naira volatility
Although the CBN, since it announced the changes to the forex market, has allowed the naira to slump(the local currency closed at N770.17 per dollar last Friday from N765.13/$1 on Thursday) in order to help bridge the gap between the official and unofficial exchange rates, the concern in financial circles is that foreign investors may not return to the I&E window without a further increase in interest rates.
Conclusion
As analysts have pointed out, the success of CBN’s recent reforms in the forex market will depend significantly on the country’s ability to attract inflows.
