The expectations of Nigerians that the improvement in prices of oil in the international market will have a positive impact in the foreign exchange market appear dashed as nothing has really changed in the market.
Analysts are of the opinion that because the foreign exchange market operates with different exchange rates, the possibility of an improvement is very slim and also coupled with the fact that the oil market operates as a futures market. They said oil high prices seen now may not materialise immediately.
According to a Central Bank of Nigeria’s (CBN) report, the foreign exchange market in Nigeria received $5.62 billion in the fourth quarter of 2020 from the CBN in a bid to increase availability of forex to meet the demand for business operation.
The capital disbursed in Q4 last year surpassed the $4.37 billion offered in the preceding quarter. However, the capital fell by 46.1 percent when compared to the corresponding period of 2019 when $9.98 billion was received by the foreign exchange market.
During the period under review, the report stated that Bureau De Change (BDC), as well as investors and exporters’ window sales of forex, rose significantly.
However, Brent prices which averaged above $40/b by June 2020, increased to $50/b by the end of 2020. Prices increased to $65/b in March 2021 due to rising oil demands as COVID-19 vaccination rates increased and economic activity picked up.
Over the past four years, the CBN’s foreign exchange reforms have assisted with improved liquidity.
Significantly, in light of the COVID-19 outbreak, there has been additional vulnerability to swings in oil prices as well as increased exit of foreign portfolio investors (FPIs) which have adversely affected exchange rate stability.
Analysts at FBNQuest in a note to Daily Independent, titled, ‘Dynamics within the forex market’, said the demand for forex remains high and the supply is inadequate for regular uses. The CBN’s Investors and Exporters (I&E) window rate is currently N409/$. This compares with N482/$ at the parallel market.
“Oil receipts (including oil-related taxes) contribute to external reserves. Oil prices have continued to firm over the last few months, averaging $61/b in Q1 ‘21. This compares with $45/b recorded in Q4 ‘20. The recovery can be attributed to production cuts by OPEC+ and ongoing mass vaccination across the globe which has fueled optimism on a global economic recovery”, the analysts said.
Despite the welcome recovery in oil prices, economic experts still believe that Nigeria’s foreign exchange market is still faced with uncertainty.
“The gross official reserves declined modestly in March by $279 million, this is subject to a caveat that the figure should be adjusted downwards to allow for the pipeline of delayed external payments, which the IMF estimated late last year at up to $3 billion.
“The modest decline is perhaps due to the CBN’s ‘Dollar for Naira’ initiative, its latest move to boost the flow of Diaspora remittances into the country and thus boost forex supply”, the analysts said.
There have been several calls for the CBN to harmonise the multiple exchange rates in operation, which encourages arbitrage and market fragmentation. This has remained a source of concern for multilaterals and, of course, FPIs. FPI inflows via I&E (or NAFEX) window reduced significantly to $309.2 million in Q1 ‘21, compared with $3.3 billion and $7.8 billion in the corresponding period in 2020 and 2019, respectively.
In Q1 ‘21, the CBN’s contribution to I&E forex inflows was just $83.4 million (4.5% of the total), compared with $1.8 billion (49.6%) in Q4 ‘20 and $5.4 billion (48.7%) in Q1 ‘20.
Alhaji Aminu Gwadabe, President, Association of Bureaux De Change Operators of Nigeria (ABCON), said the only way out of the hiccups in the forex market is that the CBN should unify all rates as this will calm the market.
“The CBN has tried to directly manage the forex market in the last four years but as it is, I think the CBN needs to take a bold step further and unify the exchange rates. This will greatly calm the market”, he noted.
Speaking of hope, analysts at FBNQuest said, “While market participants, including FPIs, are hopeful that the CBN will resume interventions in the I&E window, there has been no significant intervention from the CBN since the beginning of the year. The market has been largely dependent on local autonomous sources.
“As a result of the CBN’s minimal intervention in the I&E window, the NAFEX exchange rate has steadily crept upwards from N394/$ on 04 Jan ‘21 to N409/$ on 09 Apr ‘21. We assume this move by the CBN is an attempt towards possible unification of the various exchange rates”.
In the IMF Article IV on Nigeria released in February, the Fund’s estimates suggest that the naira was overvalued by 18.5 percent, and recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime, with the near-term focus on allowing for greater flexibility and removing the payments backlog.
Mr. Johnson Chukwu, Managing Director and Chief Executive Officer at Cowry Asset Management Limited, said the economy is a very difficult one to navigate because of the happenings in the forex market and that uncertainty in the foreign exchange market came about because of major reasons.
He said, “The truth of the matter is that Nigeria’s crude is sold in the futures market. For instance, this is April, the crude you are selling now, you will not get the money now but sometimes in June or July. When prices of oil go up, you may not get the effect in the market now.
“The second reason is that we still have arrears of forex demand from FPIs and this is increasing. The CBN has arrears that it must pay and we are seeing that these arrears are piling up and are increasing. Naturally, the CBN will be more interested in paying the arrears than to face what is happening now. Instead of deploying the forex to meet immediate demand, they will channel it to settling arrears.
“Thirdly, we should also look at where the policy of the CBN wants the market to be. If they want to intervene, there must be very strong reserves”.
CBN data show that Nigeria’s gross official reserves declined by $280 million to $34.82 billion in March. Analysts believe that in the name of accuracy, this figure should be adjusted downward to allow for the pipeline of delayed external payments, which the IMF estimated late last year at up to $3 billion and which the CBN has since indicated as substantially lower.
