The exchange rate between the naira and the dollar may be further devalued according to information contained in the Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) report recently released by the Federal Ministry of Finance, Budget, and National Planning.
In a paragraph seen by Nairametrics, the report acknowledges the recent devaluation which the CBN likes to call “adjustment” and highlights generally accepted belief that a further devaluation could be in the offing.
“The official exchange rate has also been adjusted upwards to N360/US$1 by the Central Bank of Nigeria (CBN). At the Importers & Exporters Foreign Exchange (IEFX) window, where the bulk of foreign exchange transactions are consummated, the exchange rate recently depreciated from about N362/US$1 in January 2020 to over N385/US$1. While the CBN continues to make strenuous efforts to stabilize the exchange rate, it is generally expected that the Naira will suffer further devaluation as Nigeria is projected to lose about US$26 billion in oil revenues, its principal source of foreign currency,” MTEF
What this means: The government’s admittance that another devaluation could be in the offing perhaps explains why speculators are still holding out and retaining the disparity between the parallel market rate and the exchange rate at the I&E window. The black market rate has averaged N445/$1 while the I&E window trades at about N390/$1.
The President in his democracy day speech remained boisterous about Nigeria’s external reserve situation even though pent up demand for forex is estimated to be between $1 billion and $2 billion.
“The external reserves grew from $33.42 billion on April 29th, 2020 to about $36.00 billion in May 2020 which is enough to finance seven months of import commitments. We have witnessed eleven quarters of consecutive GDP growth since exiting recession. The GDP grew from 1.91% in 2018 to 2.27% in 2019 but declined to 1.87% in the first quarter of 2020 as a result of the decline in global economic activities due to the COVID-19 pandemic,” Buhari said.
Nigeria recorded an oil revenue shortfall of 30% in the first quarter of the year with oil revenue of N464 million representing a shortfall compared to N659 million budgeted in the same period. The actual receipt for non-oil revenue was N269 billion representing a shortfall of 40%. Nigeria now spends about 99% of its revenue on debt service.
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With the government under pressure to earn dollars, reliance has shifted mostly towards foreign borrowing. The government recently received $3.4 billion from the IMF while the National Assembly as approved another $5.5 billion in new loans. Whilst this will increase Nigeria’s external reserve position, lenders could call for another devaluation if they are to subscribe to FGN Eurobonds. It is also important to note that devaluation increases government revenues and is another incentive to consider devaluing.
Most speculators who have spoken to Nairametrics on the condition of anonymity believe lower earnings from oil and exports, in general, will pile more pressure on the country’s external reserve position. They also bet that demand pressure for dollars will force another devaluation as dollar inflows remain dampened. They cite the lockdown as temporary succour that will evaporate once full business activities commence and businesses demand forex to import.
U.S dollar remains neutral as strong economic macros weaken its demand
The U.S. Dollar Index was slightly down at 0.02% to 97.040 at 1.30 pm Nigerian time.
U.S dollar pulled back sessions high on Friday as Economic data released earlier showed the second-largest economy service sector printing impressive results, with the (Chinese) Caixin Services Purchasing Managers Index coming in at 58.4 in June, the highest reading in two months.
The U.S. Dollar Index that monitors the American dollar against a group of other major currencies was slightly down at 0.02% to 97.040 at 1.30 pm Nigerian time.
Consequently about 24 hours ago the world largest economy recorded an addition of 4.8 million jobs in June and manufacturing activity printing a better economic result than expected, this further suggests that the economic stimulus by the U.S Fed Reserve seems to be working.
In addition, Currency analysts at ING, in a research note spoke about the U.S Federal Reserve stimulus package in relation to the strength of the dollar.
“Fed money printing has now secured what seems to be a stable negative correlation between risk assets and the dollar,”
“As long as the Fed is still buying assets and prepared to do more, we expect this negative correlation, Risk On, Dollar Off, to dominate financial markets over the coming quarters. Economies slowly getting back on their feet should mean a backdrop of a benign dollar bear trend in the second half of the year.”
Why this matters; The U.S. Dollar Index that tracks the American dollar against a basket of other major currencies (like the Japanese yen, British pound sterling, Swedish Krona, Euro), Individuals hoping to meet foreign exchange payment obligations, via dollar transactions to countries like Europe, and Japan, would need to pay more dollars in fulfilling such transactions
CBN adjust naira from N360 to N380 at SMIS
Reports reaching Nairametrics indicates the CBN has instructed bidders at its Secondary Market Intervention Sales (SMIS) to increase their bidding price to N380/$1 floor. The SMIS is the market where importers bid for forex using Letters of Credit and Form M.
According to our sources, the central bank informed banks that they will only accept bids from N380/$1 and above and no longer N360/$1 meaning those who bid lower will not get any forex allocation. Transaction success in this market is based on bids with those who bid higher than the floor as they are often in an advantageous position to secure forex.
This is essentially a huge attempt at unifying the naira and another adjustment of the exchange rate by the CBN. Recall the CBN Governor had informed investors that the bank will be unifying the exchange rate towards what is being traded at the NAFEX market where investors and exporters trade forex.
Nairametrics understands a circular has been sent to banks but we are yet to see it.
The SMIS window was created by CBN for importers to ease the pressure faced by businesses in the foreign exchange market through sales of foreign currency to authorized dealers (wholesale) or to end users through Authorized dealers. Businesses usually conduct their bid for forex at the SMIS window every two fortnight.
Currently, rates are set at a floor of N360/$1 and a ceiling of N385/$1. Thus bidders are expected to bid within that range. The higher the bid the better your chances at getting forex. It is unclear if there were any buyers that bid above N360 as we gather most of the importers were not informed of the changes in prices until today.
In February, the CBN has injected $218.41 million into the inter-bank retail Secondary Market Intervention Sales (SMIS). The dollar sold at the time meant for only agricultural and raw materials sectors, is in continuation of its intervention in the inter-bank foreign exchange market. In May, the central bank surprised the market by injecting estimated $90-$100million to the system.
Naira gains against the dollar across forex markets as liquidity hits record increase
At the black market, the naira appreciated marginally by N1 to a dollar to close at N461 to a dollar.
Forex turnover at the Investor and Exporters (I&E) window had a rebound on Thursday, July 2, 2020, as it rose by 1876% day on day, a massive increase from what was recorded the previous day at the foreign exchange market. This is according to data from the FMDQOTC, an exchange where forex is traded by foreign investors and exporters.
According to the data tracked by Nairametrics, forex turnover increased from $10.37 million on Wednesday, July 1, 2020, to as high as $204.90 million on Thursday, July 2, 2020, representing a massive 1876% increase on a day-to-day basis. This also represents a major departure from the low forex supply since January 2020, the last time the market hit a $200 million turnover mark.
Despite the volatility at the NAFEX market, the spike in volume of sales provided a trading boost reducing the demand pressure experienced in recent days.
In related news, the exchange rate at the I&E appreciated on Thursday, closing at N386 to a dollar, compared to the N386.50 that was recorded on Wednesday, July 1, representing a 50 kobo gain. The opening indicative rate was N386.86 to a dollar on Thursday. This represents a 22 kobo gain when compared to the N387.08 opening rate recorded on Wednesday.
At the black market where forex is traded unofficially, the naira appreciated marginally by N1 to a dollar to close at N461 to a dollar on Thursday, as against the N462 to a dollar on Wednesday. The exchange rate at the beginning of the week was N460 to a dollar. By crossing N460, the exchange rate has broken a psychological ceiling going past N460 for the first time since 2017.
Nigeria continues to maintain multiple exchange rates comprising the CBN official rate, the BDC rates, and the NAFEX (I&E window). Nairametrics reported last week that the government is mulling unifying the multiple exchange rates in a bid to increase the amount available for state governments to share.
The forex scarcity and drop in revenue put pressure on the value of the naira despite CBN’s effort to maintain stability across the forex segments. The CBN is expected to continue with its intervention in the foreign exchange market to ensure market stability.
According to a July 2020 report from Moody’s, the foreign currency funding gap for Nigerian banks is expected to rise to $5 billion due to the current low oil prices, volatile forex inflows and lower diaspora remittances amid the coronavirus pandemic. These challenges are threatening to renew the foreign currency liquidity pressures that hit Nigerian banks during the previous oil crisis in 2016-2017.
The report also indicated that dollar shortages are expected to persist over the next 12-18 months if low oil prices continue thereby renewing the forex liquidity crisis that led to severe rationing of dollar and ban on importation of some items during the last oil price crash in 2015-2017.
Forex Liquidity Issues
Despite the improved turnover recorded on Thursday, the volatility and uncertainty of the forex market still persist due to accumulated demand and liquidity shortages across markets. The rise in demand and contrasting drop in supply has called for another round of devaluation, which the CBN has insisted it has plans to implement. A devaluation last occurred in March. The activities of the speculators seem to have continued unabated.
Speculators have thus patronized the parallel market, widening the gap between it and the I&E window. The CBN maintains that the perceived demand cannot be substantiated as the lockdown induced by the COVID-19 pandemic suggest demand should be low due to travel restrictions and drop-in economic activities.
The further decline in liquidity could further fuel speculations in the black market where the exchange rate has traded at a premium of N60+ over the last few weeks. The CBN claims most of the demand being cited is not represented by any official documentation and that it has informed foreign investors with genuine forex demand to be “patient” and that they will get their forex.