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Currencies

Naira falls to 12-week low at black market as demand pressure increases

At the black market, the Naira depreciated against the dollar to close at N475/$1 on Monday.

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Naira, dollar, CBN, Exchange rate falls across forex markets despite improved dollar supply

Forex turnover dropped marginally by 2.26%, as Nigeria’s exchange rate at the NAFEX window remained stable against the dollar to close at N386/$1 during intra-day trading on Monday, November 16.

Also, the naira depreciated against the dollar, closing at N475/$1 at the parallel market on Friday, November 13, 2020 – its weakest level in 12 weeks as the inability of the official market to meet increasing forex demand of manufacturers and traders put further pressure on the parallel market

READ: Nigerian’s should expect “a significant devaluation” to N550/$1 – Goldman Sachs

This is despite the allocation of about $1 billion to Bureau De Change (BDC) Operators since September by the CBN.

Parallel market: According to information from Abokifx – a prominent FX tracking website, at the black market where forex is traded unofficially, the Naira depreciated against the dollar to close at N475/$1 on Monday.

READ: CBN announces resumption of sales of forex to BDC

This represents a N5 drop when compared to the N470/$1 that it exchanged for on Friday, November 13.

  • The local currency had strengthened by about 7.8% within one week in September at the black market, as the CBN introduced some measures targeted at exporters and importers.
  • This is to boost the supply of dollars in the foreign exchange market and reduce the high demand for forex by traders.
  • The CBN has sold about $1 billion to BDCs since they resumed forex sales on Monday, September 7, 2020.
  • This was expected to inject more liquidity to the retail end of the foreign exchange market and discourage hoarding and speculation.
  • However, the exchange rate against the dollar has remained volatile after the initial gains made, following the CBN’s resumption of sales of dollars to the BDCs.
  • The President of the Association of Bureau De Change Operators, Aminu Gwadebe, said he expects the impact of the extra liquidity in the market to be gradual.
  • Despite the drop in speculative buying of foreign exchange, the huge demand backlog by manufacturers and foreign investors still puts pressure and creates a volatile situation in the foreign exchange market.

READ: Naira falls to weakest level in 6 weeks at black market despite CBN intervention

NAFEX: The Naira remained stable against the dollar at the Investors and Exporters (I&E) window on Monday, closing at N386/$1.

  • This was the same rate that it exchanged for on Friday, November 13.
  • The opening indicative rate was N385.50 to a dollar on Monday. This also represents a N1 gain when compared to the N386.50 that was recorded on Friday.
  • The N392.80 to a dollar was the highest rate during intra-day trading before it still closed at N386 to a dollar. It also sold for as low as N381/$1 during intra-day trading.
  • Forex turnover: Forex turnover at the Investor and Exporters (I&E) window declined marginally by 2.26% on Monday, November 16, 2020.
  • According to the data tracked by Nairametrics from FMDQ, forex turnover dropped from $113.95 million on Friday, November 13, 2020, to $111.38 million on Monday, November 16, 2020.
  • The CBN is still struggling to clear the backlog of foreign exchange demand, especially by foreign investors wishing to repatriate their funds.
  • The continuous drop in dollar supply reinforces the volatility of the foreign exchange market. The supply of dollars has been on a decline for months due to low oil prices and the absence of foreign capital inflow into the country.
  • The average daily forex sale for last week was about $169.93 million, which represents a huge increase from the $34.5 million that was recorded the previous week.
  • Total forex trading at the NAFEX window in the month of September was about $1.98 billion, compared to $843.97 million in August.
  • The exchange rate is still being affected by low oil prices, dollar scarcity, a backlog of forex demand, and a shaky economy that has been hit by the coronavirus pandemic.
  • A financial expert and Managing Director of Financial Derivatives had stated that he expects the exchange rate at the parallel market to likely depreciate to N470-N475/$1 in November and December due to low oil prices that will further limit foreign exchange supply.
  • Some members of MPC of the CBN have expressed serious concerns over the increasing demand pressure in the country’s foreign exchange market. This is as obligation of manufacturers to their foreign suppliers continues to increase in the face of dollar shortages.

Explore Data on the Nairametrics Research Website

Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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Currencies

CBN explains why it introduced cash for dollar scheme

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Banks' stakeholders express 4 main concerns bothering the sector right now, CBN, MARKET UPDATE: CBN’s historic agriculture lending; Is it yielding the desired results? 

In a series of tweets on the evening of the 6th of March, the Twitter handle of the Central Bank of Nigeria explained why it offered the  Naira4Dollar Scheme in favour of diaspora Nigerians who are seeking to inflow money into Nigeria.

We had a fair look at the tweets that we have annotated for our readers. Here it goes.

1. Consistent with the global trend, Nigeria aspires to ensure that remittance flows and diaspora investments become a significant source of external financing.

What this means: The CBN is essentially admitting that foreign remittances (from Nigerians abroad) is important to boosting dollar liquidity. 

READ: CBN issues modalities for payout of diaspora remittances in dollars

2. In an effort to reduce the cost burden of remitting funds to Nigeria by working Nigerians in the Diaspora, the #CBN has introduced a rebate of N5 for every $1 of fund remitted to Nigeria, through IMTOs licensed by the CBN. The Scheme will take effect on the 8th of March 2021.

What this means: The target of the CBN are Nigerians in the diaspora who they want to offer N5 for every $1 remitted to Nigeria. While the target is diaspora remittances, the people who will benefit are their family, friends, or loved ones who withdraw the money from the bank. 

3. We believe this new measure will help to make the process of sending remittances through formal bank channels cheaper and more convenient for Nigerians in the diaspora. #Emefiele

What this means: They opine that sending remittances through Nigerian banks ends up being cheaper and convenient. In reality, they appear to be targeting other channels of remitting money to Nigerians. For example, rather than pay excess transfer charges, you transfer the money through a Nigerian bank and then get an extra N5 for each dollar. However, they will have to contend with thousands of Nigerians who simply embark on peer-to-peer exchanges. Nigerians who live in the US or Canada often prefer to sell the dollars to Nigerian living in Nigeria but who need dollars abroad.

READ: The Nigerian economy is increasingly dollarized but there is a way-out

4. New FX policy will create an easier, more flexible, and more transparent, system of remittance administration, it will greatly enhance the benefits of diaspora remittances in supporting investments and growth in Nigeria. #Emefiele

What this means: This is essentially a promo pitch. It is all about competing for your remittances. They want you to route through the bank rather than the black market.

5. Policy on the administration of remittance flows is aimed at increasing the transparency of remittance inflows, reducing rent-seeking activities, and providing Nigerians in the diaspora with cheaper and more convenient ways of sending remittances to Nigeria. #Emefiele.

What this means: This is a veiled attack on other competing and probably more beneficial ways of remitting money to Nigeria. Increasing Transparecy is basically allowing the CBN to track dollar inflows from Diaspora Nigerians and see which sectors it is flowing into.

READ: New CBN Circular: CBN confirms only Banks can pay IMTO dollars

6. PwC forecasts suggest that Nigeria’s remittance flows could reach US$34.89 billion by 2023. But this can only be accomplished if remittance infrastructure improves and if the right policies are put in place.

What this means: Interesting to note that the PWC forecast quoted by the CBN is based on data obtained from the World Bank and IMF, who in turn also base their data from the CBN and other sources. 

7. The use of reimbursements of remittance fees has been critical in supporting improved inflow of remittances to countries in South Asia and in improving their balance of payments position following the COVID-19 pandemic.

READ: CBN expects $24bn annual diaspora remittances – Emefiele

What this means: The CBN appears to have modeled this new scheme on similar policies in Asian countries. Bangladesh also has a similar scheme.

 

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Currencies

CBN’s Naira4Dollar Scheme may have been copied from Bangladesh

Bangladeshis launched a similar cash incentive for forex remitted into their country by the Diaspora.

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CBN forex restrictions on food itemsCBN approves new cheque standard for banks

It appears Nigeria’s CBN may have copied its new Naira4Dollar scheme idea from South Asian country Bangladesh who have been running a similar policy since 2019.

According to our reports, the Bangladesh government offers its citizens a 2% cash incentive on money remitted by its citizens in the diaspora. They claim this is geared towards curbing “overbearing costs of increased expenses in sending remittances and to encourage bringing in remittance through legitimate channel.”

This sounds very much like what Nigeria’s central bank is trying to do.

“In an effort to reduce the cost burden of remitting funds to Nigeria by working Nigerians in the Diaspora, the #CBN has introduced a rebate of N5 for every $1 of fund remitted to Nigeria, through IMTOs licensed by the CBN. The Scheme will take effect on the 8th of March 2021. We believe this new measure will help to make the process of sending remittance through formal bank channels cheaper and more convenient for Nigerians in the diaspora” CBN

READ: Total credit to the economy rose to N19.54trillion – CBN Governor

How the Bangladesh Model works

  • Beneficiaries will receive a direct 2% incentive for transfers of up to USD 1500 without any verification. However, for amounts exceeding USD 1500, they will have to show valid supporting documents; to prevent the misuse of money.
  • If you are a Bangladeshi national sending money back home, the government will add 2% to your transfer – the incentive is 2% of the sent value and will be paid in BDT.
  • For higher values, beneficiaries will need to show the remitter’s passport, an appointment letter from the employer, and a certification from the Bureau of Manpower, Employment, and Training (BMET). In the case of businesspersons remitting amounts exceeding USD 1500, their beneficiaries need to produce a copy of the business license.
  • If beneficiaries fail to submit the required documents instantly they are given a period of five days to submit the documents, after which the beneficiary will be entitled to receive the cash incentive.
  • If remitters or beneficiaries are found violating these rules, they will not qualify to receive any incentives in the future.
  • Source: XpressMoney  Also read this article on WorldRemit to get how it works.

READ: Bangladesh calls for collaboration with Nigeria on textile  

Nigeria’s CBN is yet to publish guidelines explaining how its own policy will be governed and if there are any terms and conditions as detailed by Bangladeshis. However, Nairametrics understands the N5 will be paid in cash to beneficiaries of the remittance or credited to their bank account.

Has it worked for Bangladesh?

In a report credited to New China News Agency, the Bangladesh Bank statistics claimes Bangladeshis in the diaspora remitted $16.69 billion in the first 8 months of its fiscal year (July 2020 – June 2021) a 33% increase year on year.

  • Bangladesh had received $12.5 billion in the first 8 months of the fiscal year July 2019-June 2020).
  • The report also cited Bangladesh Bank (BB) statistics data which revealed the remittance in February alone stood at 1.78 billion U.S. dollars up 22% when compared to the year before.
  • This amount is up by over 22 percent from 1.45 billion U.S. dollars received in the same month of the 2019-20 fiscal year.
  • Bangladesh’s remittances hit an all-time high of 18.20 billion U.S. dollars in the last 2019-20 fiscal year.
  • The report also claims remittance has been steadily rising since the announcement of a 2.0-percent incentive on remittance receipts in June 2019 to encourage the expatriate Bangladeshis to send home more money through formal channels.

READ: Why external reserves is falling despite a rise in oil prices

Bottom Line

There is absolutely nothing wrong with copying what has worked anywhere else especially if it is for the greater good. However, it is unclear if Bangladesh’s challenges with the exchange rate are similar to ours.

  • For example, Nigeria has a thriving black market for trading currencies that have better price discovery when compared to the official market. Whether this policy will work will depend on how lucrative Nigerians in the diaspora find the incentive.

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