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Demand for “Inflow dollars” drive exchange rate to as high as N420/$1 compared to “Cash dollars”

COVID-19 pandemic and the crash in oil prices have all but extinguished supply of dollars from the IFEX market (official market for trading forex).

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American Dollar remains king as stimulus fails to stop global financial market panic,Demand for “Inflow dollars” drive exchange rate to as high as $N420/$1 compared to “Cash dollars”, U.S dollar drops against major currencies, tension rises between America and China, U.S dollar gains against major currencies, America threatens China with sanctions., U.S dollar down against major currencies, more countries start lifting of COVID-19 induced lockdowns, The U.S. Dollar Index that tracks the American dollar dropped 0.14% to 96.5 as global Investors and traders appetite for risk increased in momentum, Digitization of U.S Dollar Faces U.S Senate Hearing, U.S dollar Remains Neutral as Strong Economic Macros Weaken its demand, U.S dollar Remains Neutral as Strong Economic Macros Weaken its demandU.S dollar Remains Neutral as Strong Economic Macros Weaken its demandU.S dollar Remains Neutral as Strong Economic Macros Weaken its demand

The exchange rate between the dollar and naira is trading between N380 and N420, depending on who is selling and the mode of transfer.

In Nigeria, there are two types of forex you can buy: inflowed dollars and cash dollars. Inflowed dollars refer to forex transferred from one bank domiciliary account to another domiciliary account.

It could also be dollars flowing from a bank account in the US or Europe to a local or foreign bank account in Nigeria. In return, naira is paid to the seller’s account here in Nigeria.

Cash dollars are forex bought from bureau de change operators, black market dealers or anyone who has dollars in cash wishing to sell in exchange for naira. Transfers are therefore made using cash, thus the name “cash dollars”.

According to information from traders, pent up demand for inflow dollars is estimated at anywhere from $800 million to $1.2 billion. Some of the demand is driven by companies looking to pay for their supplies, move revenues to their global offices, repatriate dividend to shareholders or hedge against future cost.

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READ MORE: CBN stops oil companies from selling dollar to NNPC, here’s why

Unfortunately, the COVID-19 pandemic and the crash in oil prices have all but extinguished supply of dollars from the IFEX market (official market for trading forex).

Demand for “Inflow dollars” drive exchange rate to as high as $N420/$1 compared to “Cash dollars”

In an investor email note seen by Nairametrics, the CBN has not sold forex since March 20, 2020 leaving export proceeds as the only source of forex. Unfortunately, supply here is thin and hardly available.

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Even when available, it is often quoted at off market prices and as high as N420/$1. In the IFEX window where forex is traded officially, traders reportedly quoted “between N387.50 and N390.00/$ for the USD/NGN pair” on Wednesday, despite the dollar scarcity.

“The IEFX market opened and closed at N387.60 and N386.63 with the highest transaction rate recorded at N401.57/$. Total volume traded for the day was $30.42mn,” as contained in the note to investors.

On exchange rate for “inflow dollars”: Several market reports seen by Nairametrics indicate that “Inflow dollars” trade at prices between N410 and N450 in the parallel market where they are traded over the counter.

Over the counter means they are not traded in the official IFEX market. Traders also opine that the volatility and disparity in price is because no one is really sure who owns dollars to sell or naira to exchange, thus price swings are wild.

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READ MORE: Tweak of exchange rates: A bold move from CBN?

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It is no longer news that the Nigerian economy could contract by as much as 8% in 2020, no thanks to the increasing cases of coronavirus cases and the fall in oil prices. The economy is being caught in cross-hairs.

Demand for “Inflow dollars” drive exchange rate to as high as $N420/$1 compared to “Cash dollars”

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What it means: If the scarcity continues, the Nigerian real sector may come to a halt, creating more problems for the ailing economy. Also, more corporate organisations would suffer major setbacks in importation of their inventories.

Most Nigerian corporates rely on this inflow or wired forex to pay for inventory orders, factory inputs, dividends, technical and professional fees, computer equipment, and intangible assets, among others.

The development is causing problems for businesses across sectors, all of which are struggling to get the dollars they need for imports.

The adverse effect is that the scarcity would cause the prices of commodities to skyrocket, putting pressure on local currencies. This dollar squeeze is frustrating investors, increasing costs, and delaying projects. It may hamper future investment in the country.

READ MORE: NSE promotes gold as viable option in the current investment landscape

Nairametrics Founder, Ugo “Ugodre” Obi-Chukwu, explained that the effect is that companies will have to “source for local substitutes, which can increase the cost of production and delivery timelines” for products. On the naira rate against the US dollar in the parallel market, he added that, “the parallel market depends on whether it is cash exchange or inflow exchange” affecting the price that will be paid.

Managing Partner, GBC Professional Services, Chartered Accountant, Gbenga Badejo, agreed with Obi-Chukwu when he observed that a lot of people hoard dollars not because they want to use them at the moment, but for speculative reasons.

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According to him, two days after the CBN adjusted the exchange rate, several people hoarded the currency only to sell at N400 from N365. That is a lot of money.

He said, “CBN has the responsibility to control the market and avoid a situation where people put unnecessary pressure on the naira. People hoarding the currency can’t do anything with what they buy, if money is with them it does not make any sense.”

On the effect that the scarcity of inflow dollars would have on the real sector, he told Nairametrics that CBN should ensure that the economy is not shut despite the lockdown. “Petrodollar is not coming; foreign reserve will be depleted and we must not allow the real sector to suffer any scarcity. The Apex bank should ensure banks meet the demands of manufacturers in that regard,” Badejo  added.

Abiola has spent about 14 years in journalism. His career has covered some top local print media like TELL Magazine, Broad Street Journal, The Point Newspaper.The Bloomberg MEI alumni has interviewed some of the most influential figures of the IMF, G-20 Summit, Pre-G20 Central Bank Governors and Finance Ministers, Critical Communication World Conference.The multiple award winner is variously trained in business and markets journalism at Lagos Business School, and Pan-Atlantic University. You may contact him via email - [email protected]

4 Comments

4 Comments

  1. Ali Ifeanyi

    April 18, 2020 at 2:31 am

    I hope we don’t see 2017 again when exchange was as high as 500 naira to a dollar

  2. Jo jo

    April 18, 2020 at 5:21 pm

    Quit being so dependent on others. Wake up Africans and begin “Doing-for-self. Cause and effect of “Miseducation of the Negro”

  3. Jo jo

    April 18, 2020 at 5:25 pm

    In the abundance of water the fool thirsty…”Rat race” what a big disgrace in those claim to be independent yet remain forever dependent. In loving memory of Robert Nesta Marley…”Rat race”…RIP

  4. Paul Kuta

    May 16, 2020 at 10:26 pm

    Can someone please explain what this figure means in forex trade…410/5….From a broker to a buyer

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Financial Services

CBN to bar exporters with unrepatriated export proceeds from banking services

The CBN will from January 31, 2021 bar all exporters with unrepatriated export proceeds from accessing banking services.

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CBN to restrict foreign exchange on more food imports

The Central Bank of Nigeria (CBN) has announced the prohibition of all Nigerian exporters who are yet to repatriate their export proceeds, from banking services effective from January 31, 2021.

The apex bank had in an earlier circular warned that failure to repatriate exports within 90 days for oil and gas and 180 days for non-oil exports constitute a breach of the extant regulation.

Analysts believe that the directive is part of a monetary control mechanism by policymaker to maintain relative stability in the exchange rate, especially after the pandemic created a wide disparity between the official exchange and the parallel market rates, eliminating incidences of over-invoicing, transfer pricing, double handling charges, etc.

In lieu of this, all concerned exporters are urged to comply with the directive before the specified date.

What you should know

  • According to Bloomberg sources, the new directive applies to exports up until June last year.
  • In a bid to ensure prudent use of foreign exchange resources, the Central Bank of Nigeria had earlier instructed authorised dealers and exporters to only open forms M for letters of credit, bills for collection and other forms of payment

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Financial Services

Niger Insurance Plc gets shareholders nod to restructure business

Niger Insurance Plc has announced plans to restructure its insurance business into distinct but mutually dependent business entities.

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Edwin Igbiti

Niger Insurance Plc has obtained shareholders’ approval to restructure its insurance business into general, life and business insurance, with each segment to be structured as a separate legal entity.

This is part of the resolutions passed at the 50th Annual General Meeting of Niger Insurance Plc., held on 20th of January, 2021 at Peninsula Hotel in Lekki, Lagos.

The decision to restructure the company is in a bid to make it more efficient and profitable to stakeholders, especially as efforts are geared towards overturning a loss of about 1,1723.2% Year-on-Year, earlier made by the company in its last reported financial statement, Q2, 2020, as reported by Nairametrics.

Other key decisions reached at the 50th AGM include;

  • The re-appointment of Mr Ebi Enaholo and Mrs. Olufemi Owopetu as Directors of the company.
  • Acceptance of the presented financial statement for the year ended December 31, 2019 and the report of the audit committee, directors and auditors.
  • Directors were authorized to fix the remuneration of the auditors.
  • Directors were authorized to appoint external auditors to replace retiring auditors of the company.
  • The appointment of four individuals as members of the audit committee.
  • A decision to restructure the company’s business capital was also reached.

In case you missed it: The shareholders of Niger Insurance Plc in the 49th Annual General Meeting approved the decision by the company’s board to raise additional capital to the tune of N15 billion, in a bid to meet the revised recapitalization targets for general and life insurance companies.

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What you should know: The House of Representatives had in December 2020 directed NAICOM to suspend the mandatory deadline for the first phase of 50%-60% of the minimum paid-up share capital for insurance and reinsurance firms.

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Energy

Nigeria’s Qua Iboe crude exports resume as ExxonMobil lifts force majeure

ExxonMobil has lifted a force majeure on Nigeria’s Qua Iboe crude oil exports as production resumes.

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ExxonMobil has lifted a force majeure on Nigeria’s Qua Iboe crude oil export terminal, as crude exports resume for the first time in almost six weeks after a fire at the terminal halted operations.

This is according to a company spokesman yesterday, who confirmed the company had lifted force majeure on Qua Iboe crude loadings.

Qua Iboe production started to ramp up to normal levels of 200,000 b/d in the past week, according to sources, with the release of both the February and March loading programs.

The VLCC Dalia was also in the process of loading a 1-million-barrel stem at the Qua terminal since January 21, 2021, according to data intelligence firm Kpler. This will be the first export of Qua Iboe since December 15, 2020, after a fire hit the facility and injured two workers.

The company has been under pressure since the closure and prices have taken a hit as a result of the disruption. S&P Global Platts last assessed the grade at a discount to Dated Brent of 50 cents/b, down from a premium against the benchmark in December.

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Bonny Light, a mainstay Nigerian crude which typically trades at roughly the same level as Qua Iboe, was last assessed 30 cents/b higher.

What they are saying

One trader said: “If you get a cargo of Qua now it could be 50 cents to a dollar below Bonny even – a January cargo is completely out of cycle and the reliability issues mean people won’t touch it.”

Another trader stated that: “[The return of Qua Iboe] is not what West African crude assessments (WAF) differentials needed.”

What you should know

  • Qua Iboe is one of Nigeria’s largest export grades, and is very popular among global refiners, with India, the US, Canada, Italy, Spain, Indonesia, and the Netherlands being key buyers.
  • Qua Iboe is light sweet crude, which has a gravity of 36 API and sulfur content of 0.13%. The crude, produced from fields 20-40 miles off the coast of southeast Nigeria, is brought to shore at the Qua Iboe terminal via a seabed pipeline system.
  • Indian demand has steadied following a buying spree late last year, and European demand has been hit by renewed coronavirus lockdowns in the region.
  • Prices for Nigerian crude have suffered in recent weeks, even with lower supply due to the outage.
  • February and March loading programs have been issued for Qua Iboe averaging 169,643 b/d and 153,226 b/d respectively.
  • Production of this key grade ranged between 180,000-220,000 b/d in 2020, according to S&P Global Platts estimates.

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