Nearly three weeks after the Central Bank of Nigeria (CBN) shut down the foreign exchange (FX) market, the prevailing issues have gotten tougher and deeper, disturbing people and companies all over the place.
Dealers are trapped on a one-way track, and market illiquidity has reached an all-time high in both the official and unofficial parts. End-users are in a desperate situation since banks and black-market dealers are the only ones left with access to FX needed to stay in business.
The illiquidity situation is becoming worse, and many businesses that depend on imported goods are in a pickle. We learned this over the weekend that important international business and personal visits are being postponed.
Market arbitrage, which had reached 100% sometime ago, becomes unimportant with converging rates, trapping users between the opaque illicit market and burdensome official marketplaces.
Yesterday, it was widely reported that several commercial banks had stopped processing FX requests because they were short on money. A representative from a top bank’s FX desk stated, “We are fully booked” for the month, three days into the new month. She was therefore taking care of fresh applications.
“We are only able to finance two transactions each month, and we have already begun processing the ones we can accept. All of our branches must follow this,” the banker stated.
She said that the branch allotment could only cover two people when asked why she only allowed two applications. Three other people were at that time asking questions concerning funding for personal travel allowances (PTAs). But everyone went home unhappy.
However, of the two main causes, illiquidity is the only one that causes many banks to delay processing new applications. When selling foreign exchange to end customers, deposit money banks (DMBs) are obligated to utilize the weighted average rate from the most recent trade at the FMDQ platform as the going rate.
The procedure is incredibly complicated, according to sources at several institutions, because of the market’s current viability and the fact that rates fluctuate every day.
“The pricing may have changed before approval occurs if a procedure is started and a recommendation is completed. That renders the entire procedure invalid. You might not always be certain of the market rate between approval and payout. Because of this, the procedure is rather strict, a banker explained.
Kemi Ashefon learned yesterday that several banks have instructed their employees to forgo processing any paperwork related to personal travel/business travel allowance (PT/BTA) and other invisible FX users until they have a firm grasp of the new procedure.
However, we were unable to independently verify the statements made by the banks’ corporate communications managers. To acquire an update on current rules, several of the communications officials acknowledged they would require some time.
No comments were made by CBN spokespersons on the problems. The bank, however, is fully avoiding “both funding and regulation of the application process,” according to an internal source.
“There are willing buyers and sellers in this market. The CBN is unrelated to client interaction and funding at the banks. The commercial banks decide on the operating procedure, funding, and disbursement based on availability, the insider said, but the CBN also establishes the regulatory framework.
When asked if the bank may think about providing liquidity, the source responded that since the market is completely liberalized, the option was not being considered.
Given that changes have significantly improved the market outlook, supply is anticipated to improve in the coming months. However, research suggests that the investment market, particularly foreign investors, is now in a wait-and-see phase. A key component of the mix of variables that might spur capital influx is the fiscal track record of President Tinubu, who is anticipated to present a list of cabinet choices to the Senate this week.
The new government will be chosen based on talent rather than politics, according to economists and other stakeholders, and measures must be taken to stop budgetary rascality.
Financial indiscipline and monetary failure are two different problems. However, they all touch on fundamental problems with bad administration and long-standing economic difficulties that the nation has faced over the years.
Kemi Asefon noted by a variety of sources, particularly in the investment business, that pipelines are overflowing with leads. However, there is a delay between the start of reforms and the final investment decisions (FIDs) that finally release the required funding, in this case dollars in the case of Nigeria.
According to some analysts, these discrepancies between expectation and reality are some of the challenges that have prevented the naira from responding favorably to the changes enacted by the new administration.
The Bank of America (BoA) claimed last week that the naira had depreciated to an undervalued level. It values the local currency at N680 per dollar as its fair value. “An addition of $12–13 billion on export revenues from higher oil production is moderated by a liberalized imports regime that could add $10 billion as non-oil imports rise,” the bank reportedly wrote in a letter to customers. However, there was a net gain of $2 to $3 billion, which increased the current account surplus.
BoA agreed with other analysts when they stated that the near-term pressure might last the remainder of the year as the economy struggles with unmet FX needs.
In a discussion, former vice president of Parthian Group and investment expert Ola Oladele stated that “pent-up demand and a backlog of unfulfilled demand will take some time to unwind.” She stated that the current pressure will last till then.
“I anticipate that it will take some time for things to calm down since banks are required to purchase items from the market in order to provide them to their consumers.
“A more significant and consistent supply is required. We anticipate that in the short- to medium-term, opening up the markets will boost confidence. This should stimulate foreign investment as well as the return of cash from Nigerians living abroad, she continued.
Oladele is waiting patiently for “banks to open up the use of Naira cards for foreign transactions, even if it is within limits” despite the fact that he is similarly short on foreign exchange as the rest of Nigeria. Given the impending summer break, she thought that would decrease demand for PTA.
The following months will be a rough ride for the naira because of the impending heat, according to analysts.
Extreme market volatility makes matters worse, especially when the official window trades at an exceptionally high volatility level and worries about a potential big problem are raised. At the Investors’ and Exporters’ (I&E) window, the large fluctuation has become the norm, which raises questions about the potential for market manipulation.
The dollar fluctuated on Friday between N461.5 and N841, which is quite unusual even in worldwide parallel currency markets. The market began trading at N758.56 to $1 before moving to its usual, wildly unpredictable intra-session volatility. The final price was N769.25/$.
The market rose quite close to N741.5 to the dollar yesterday. However, the crazy swing trading persisted.
Dr. Muda Yusuf, the Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), tasked the Central Bank of Nigeria (CBN) on Sunday with taking action to reduce the high level of market volatility.
Having praised the FX rates harmonisation for its potential to bring back market stability in his half-year (H1) economic assessment, Yusuf asked the apex bank to “put in place a sustainable intervention framework to moderate the volatility in the forex market.”
Godwin Owoh, a professor of applied economics who had been heavily involved in the CBN’s consultancy efforts, could only hope that the market would stabilize soon. Otherwise, he called this situation of the market “currency liquefaction,” where the fundamentals of the valuation appropriation are entirely corroded, and it is indicated by excessive volatility and other pervasive problems.
Rate harmonisation, according to Owoh, is a necessary but insufficient step toward ensuring market stability. He said that it was time to address the human aspect component of the reform and “lift the curtain off the apex bank.” He said it would necessitate a thorough inquiry of each individual who was a member of the executive group that had recently directed the regulator’s policy course.
“What the present administration has done is the first stage of the response. The next significant step is to investigate the root of the initial issue and firm up the foundation so that the construction can stand on it. In order for the earth to be able to resist the weight imposed on it, it is not enough to strengthen the crumbling building as the government has done.
The expert explained that in order to do this, the monetary authority would need to be thoroughly cleaned, as well as long-standing corruption addressed. The President first referred to the cleanup as a “housecleaning,” but Owoh insisted that FMDQ and any associated operational structure must be dismantled as part of the process. He claimed that monetary reform could not be considered to have begun in earnest until sizable recoveries are achieved and wrongdoers are punished.
The bizarrely ordered exchange rate convergence by President Bola Tinubu, which some have seen as an infringement of the CBN’s constitutional right to monetary autonomy, became effective on June 14.
The difference between the official and black market pricing has since decreased to zero. The Investors and Exporters (I&E) window closed at N763/$ yesterday, or almost the same price as it is now trading on the underground market.
The convergence of FX rates ought to have facilitated end users’ decision-making. However, the dealers on the black market are out of cash. Since there is nothing to sell, most quotes have been one-way (buying), according to a dealer.
“Supply is meager, and it takes two or three days to obtain even a little. Dealers don’t bother to provide selling rates because of this. Only when you have to sell can you give a price.