The Economic Sustainability Committee set up by President Buhari to propose action points that can address the economic challenges of the COVID-19 pandemic has proposed a unified exchange rate to increase FAAC payments. The plan was put together by the Economic Sustainability Committee (ESC) assembled by President Muhammadu Buhari. Members of the committee included the Vice President, CBN Governor, 15 Ministers, GMD NNPC, and the Permanent Secretary.
The committee made several recommendations for the government to follow settling for a scenario that requires a stimulus of N2.3 trillion. According to information contained in the report, the committee settled for a variant of scenario 3 which requires a stimulus package of N2.3 trillion. The government explained that the reason for settling for Scenario 3, citing “the low level of revenues and the importance of monetary stability” as reasons.
The scenario also involves spending on infrastructure development and continued focus on agriculture and self-sufficiency in line with the president’s “produce what we eat” mantra. “We decided that the best way to beat the triple problem of very low foreign exchange, huge unemployment, and negative growth is by focusing on Mr. President’s mantra to produce what we eat and eat what we produce” the report revealed.
In dealing with Nigeria’s exchange rate debacle, which in recent years seen the country maintain multiple exchange rate regimes, the imposition of capital controls and ban on several imported items, the committee made proposals that involve unifying the country’s exchange rate system.
On page 34 of the report, which deals with monetary policy measures, the committee recommended that the government “Unify exchange rates to maximise naira returns to FAAC from foreign exchange inflows.” Here are the policy recommendations contained in the monetary policy measures;
- Provide N1tn in loans to boost local manufacturing and production across critical sector.
- Unify exchange rates to maximise naira returns to FAAC from foreign exchange inflows.
- Manage the exchange rate in a sustainable manner.
- Invoke partial risk guarantees for SMEs.
- Grant additional moratorium of 1 year on CBN intervention facilities. • Reduce interest rate on intervention facilities from 9% to 5%.
- Create N100bn target credit facility for affected MSMEs.
- Grant regulatory forbearance to banks to restructure terms of facilities in affected sectors.
- Improve foreign exchange supply to the CBN by directing oil companies and oil service companies to sell foreign exchange to the CBN rather than the NNPC.
Flashback: Recall, the CBN in March adjusted (devalued) the naira from N307/$1 to N360/$1 in the official market where the government converts forex from crude in exchange for Naira from the CBN. It then moved the rate at which it sells forex in the Bureau De Change to N378-380/$1 from N360/$1.
- In a press release stating its adjustment, the CBN officially devalued by 15% moving from N307/$1 to N360/$1.
- Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1.
- Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs).
- According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1.
- The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.Since then, transaction volumes have crashed in the IFEX market where forex is traded as investors react to the Covid-19 lock-down.
The black market where the exchange rate is also sold crashed to as high as N460/$1 this week as dollar scarcity persisted in the market. The CBN had also recently stated that International Oil Companies “IOC’s should henceforth sell dollars directly to CBN and not the NNPC as was the case.
“We are committed to improving forex supply to the CBN, by directing all oil companies -international, and domestic, whether you are in the service industry, or producing, upstream, midstream, downstream, or related companies, to sell their foreign exchange to the CBN and no longer to NNPC, for purposes of funding even import of petroleum products, and also new policy on price modulation.”
The CBN hopes this policy will make it more active in the forex market injecting more liquidity in the I&E window. Estimates of private sector dollar demand, otherwise called “pent up demand) is anything between $2 billion and $5 billion depending on who you talk to. There are no official stats.
What this means: The committee is proposing unifying the exchange rate as one of the countermeasures to deal with the shortage in its Federal Accounts Allocation Committee where oil and non-oil revenues accruing to Nigeria are shared by the Federal and State Governments. This means the more depreciated the naira is against the dollar the more cash the government has available to disburse via its FAAC sharing.
Nigeria still has multiple exchange rates as we have highlighted in the report above. The BDC segment exchanges for N368/$1, the I&E window which is market-driven exchanges for about N397/$1, the CBN buys from the NNPC at N377/$1 and the black market is trading for between N450-460/$1. Unifying the exchange rate will mean that the government goes back to the days of fixed exchange rate where it determines the rate it will be traded for in all markets, or have a single exchange rate market where forex is traded at market-determined prices.
The CBN and according to sources, the presidency, currently does not believe in floating the exchange rate between the naira and the dollar.
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.