• CBN vows to ensure exchange rate stability
• Sustain rebound with external reserves, experts urge
What appears like a gradual easing of the naira started at the weekend as the parallel market operators started dumping dollars ahead of the resumption of sale of foreign exchange (FX) to Bureau De Change (BDC) operators.
As of Saturday afternoon when The Guardian monitored the Lagos market, the dollar was exchanging for between N466 and N470 amid widespread cautious buying.
Last week, the Central Bank of Nigeria (CBN) announced via a circular that it would commence routine injection of FX through registered BDC operators on August 31, 2020 (today). According to the circular, FX will be sold to operators Mondays and Wednesdays at N386/$1.
The apex bank also disclosed that banks would resume over-the-counter sale of FX to finance overseas school fees, medical tourism, and other foreign travel-related invisible transactions.
With each of the registered 2,991 BDC operators getting $10,000, a total of $29.9 million will be injected into the market through the widow each of the trading days.
The market responded positively to the announcement, leading to a modest appreciation of the naira in the parallel market. This has also halted speculative deals, with the operators avoiding big-ticket transactions.
Some of the traders who bought dollars at N477/$1 on Friday morning sold at a discount of N7 to N10 per dollar about 24 hours later. A trader in Ajao Estate, Ayuba Danladi, said his customers who had requested for dollars earlier called to inform him that they would hold on till this week when they expect the naira to accumulate more value.
The new development may have affected the usual energy at Ajao Estate and Yaba trading spots. Traders at the two places were inclined to offloading what they had in their vaults to cut their losses.
At NAHCO, trading was cautiously done. An operator who identified himself as Shakara Garba said he still buys “small quantity” even with over $200,000 he warehoused at an average of N472/$1 yet unsold.
Like many of his colleagues, Garba said CBN’s intervention “will never meet the market demand.” Noting that the impact of CBN’s sale on the black market will not be instantaneous, Garba said the planned resumption of international flights would come along with activities that would firm up the value of the dollar. Sources also hinted that high-net-worth individuals had started huge sell-off of their foreign currencies holding on the realisation that they could lose a fortune when the BDC injection resumes. A trader disclosed that his customer called him to pick up $60,000 on Saturday, saying he (the customer) would prefer to hold naira in the meantime.
“Initially, he wanted to sell for N470/$1. I told him nobody would buy at that rate. After a few hours, he said he would take N465/$1. If I negotiated, he would have accepted $460/$1, but I cannot buy that large quantity because, if I keep it till next week, I may sell at a huge loss,” the trader narrated.
The CBN stopped the sale of FX to BDC operators on March 27 on the heels of the announcement of movement restriction as part of containment measures against the spread of COVID-19.
The exchange rate at the parallel market sparked, climbing from N395/$1 it sold on March 27 to N480/$1 at some point before it eased slightly to settle at N477/$1 on August 27, 2020, exactly five months after the BDC window was closed.
Managing Director, Afrinvest Securities Limited, Ayodeji Ebo, said the CBN announcement would continue to strengthen the value of the naira at the parallel market. He, however, said that this is “not sufficient to collapse the gap between the BDC rates and the parallel market rates.”
Ebo said CBN’s expanded secondary market intervention sale (SMIS) window to enable businesses access dollars would also take pressure off the local currency.
“If the CBN keeps to its words to selling dollars to the BDC operators, we don’t expect to see much activity at the parallel market. The rates will moderate as speculation will be minimised,” he stated.
In the same vein, President of the Association of BDC Operators of Nigeria (ABCON), Aminu Gwadabe said the apex bank’s announcement was the “miracle that broke the control of the forces” hitherto involved in speculation and hoarding, which resulted in liquidity squeeze in the market.
According to him, resumption of sales to BDC operators will inject liquidity into the retail end of the market as well as discourage hoarding and speculation.
He said; “The BDC operators provide a better network for foreign currency liquidity availability to the critical retail end of the sector, which was taken over by unlicensed operators during the lockdown. With the news of imminent resumption, the monopoly of illegal operators has been broken.”
Uche Uwaleke, a Professor of the capital market at the Nasarawa State University, also confirmed that the black market was currently responding to the announcement. He said that the announcement had brought to an end the era of currency speculation and hoarding.
Uwaleke insisted that the CBN would be able to sustain its intervention with the current external reserves.
Godwin Emefiele, the CBN governor, had earlier frowned at currency speculation, warning that those involved in the illicit activities would have themselves to blame when the bank resumed injection in BDC trading.
Director of Communications at the CBN, Mr. Isaac Okorafor in an exchange with The Guardian, yesterday, said the recent depreciation in the Naira exchange rate was basically a result of the COVID-19 pandemic and the dynamics of the global oil industry. “The decline in foreign portfolio flows is not peculiar to Nigeria. For some time now, almost all emerging markets have had capital flow reversals,” he said.
According to Okorafor, the situation in the oil-producing countries during the first and second quarter of 2020 had been worsened by the pandemic, just as “India, China, Turkey, South Africa, Nigeria, and other emerging markets have lost large sums of flows. Growth has equally suffered, as there is a recession in the United States, Europe, and everywhere around the world.
“We believe that as the uncertainty in the global economy due to the pandemic reduces, flows would pick up, and with the resumption of forex sale to BDCs, the Naira will strengthen to what we believe should be its true value given the present circumstances.’
He explained that the CBN was vigorously pursuing economic diversification and import substitution “basically to ensure exchange rate stability.”