CBN Pumps Fresh $240m into FX Market, To Fund BDCs Weekly

Obinna Chima
The Central Bank of Nigeria (CBN) on Monday injected an additional $240 million into the foreign exchange (FX) market.

A breakdown of the intervention by the central bank showed that $90 million was sold directly to banks to meet the requests for retail invisibles while $150 million was also offered to authorised FX dealers through the interbank wholesale auction window.

CBN spokesman, Mr. Isaac Okorafor confirmed the figures, disclosing that the CBN also adjusted its earlier pronouncement that Bureau de Change (BDC) operators would get dollars twice a week to Tuesdays only.
He explained that the adjustment was to reduce logistical difficulties.

According to Okorafor, henceforth, the CBN would sell $10,000 only to low-end forex dealers once a week.
Furthermore, he explained that in a bid to further ease the access of customers to FX, the CBN also directed all banks to pay cash over the counter to desiring customers.

While urging the banks to oblige the genuine requests of customers, the spokesman advised customers to report any uncooperative bank to the CBN through the available platforms.
The CBN in the last six weeks has intervened almost twice or thrice weekly in the interbank FX market in its bid to sustain supply of the greenback to different categories of users.

In addition, the CBN spokesman expressed optimism that the $150 million offered to authorised FX dealers in the interbank wholesale window to meet the requests of wholesale customers would be fully subscribed at the auction, as was the case at the last auction on March 28.

Despite the recent interventions, the naira slumped further to N396 to the dollar on the parallel market yesterday, from N394 on Friday.
Commenting on the CBN’s action in recent weeks, Renaissance Capital (RenCap) Limited said in a report yesterday that the convergence of the interbank and parallel rates could be a precursor to the devaluation of the naira to between N350-N390/$1.

The financial advisory and research firm said that the CBN’s fixation with a stable FX rate implied that it would need to sustain its injections to contain the parallel market premium.
“We estimate FX reserves will begin to fall when the CBN’s quarterly injections exceed $3.7 billion. Nigeria’s oil receipts – the country’s biggest source of FX, by far – will be a key determinant of how much the CBN can inject into the market while keeping FX reserves flat.

“In our balance of payments (BoP) scenario analysis, we make a few assumptions, the most material being that of crude oil production.

“We assume that Vice-President Yemi Osinbajo’s overtures to Niger Delta stakeholders in recent months have helped stabilise oil production at about 1.9 million barrels per day.
“Based on that assumption and our commodities team’s oil price projection of $55/bl for 2017, we estimate the CBN can inject $3.7 billion per quarter (from 2Q17 to 4Q17), on average, and concurrently keep FX reserves stable at $30 billion. An injection greater than $3.7 billion would result in reserves falling.

“At what point do the FX injections for imports result in FX reserves falling? The oil price retreat in recent weeks implies there is a risk the oil price could end up lower than our average $55/bl projection.

“If we assume production is fixed at 1.9mbpd, we find that FX injections would trigger a fall in FX reserves when the oil price drops below $45/bl.
“When we do the converse, and assume that the oil price averages $55/bl, FX reserves begin to fall when production drops below 1.6mbd,” RenCap added.

According to the report, foreign loans would also give the CBN’s FX injection policy “some legs”, noting that proceeds from the Eurobond issues and potential World Bank and African Development Bank loans of between $1-1.4 billion would also support the CBN’s FX policy.

“However, this may be countered by net errors and omissions (E&O). The risk to our analysis is our zero net E&O assumption.
“History shows that when Nigeria’s current account (CA) is in surplus (deficit), net E&O tend to be negative (surplus). We are forecasting a small CA surplus for 2017, which means we may be overstating how much FX the CBN can inject, while keeping reserves flat.

“This highlights the risk of this policy and underscores the need for the central bank to move away from a stable FX policy, not least to prevent a resumption in the fall in reserves.
“The sustainability of the central bank’s FX injection policy is largely dependent on oil export receipts, especially given that net financial inflows, which include FDI and portfolio investments, are low and are unlikely to pick up significantly in the absence of a move to a market-determined FX rate which is our expectation.

“In 2015, net FDI and portfolio investments were equivalent to only five per cent of total export revenue.
“This implies that the oil price and production assumptions in our BoP model are important, because they will have a material impact on our FX injection estimates.
“In rationing FX, the central bank has controlled the amount of FX that Nigerian residents and businesses can use to import goods and services and repatriate income.

“We believe the central bank’s FX demand management policy largely explains the restoration of a CA surplus in 2016, of 0.7 per cent of Gross Domestic Product (GDP), by our estimates.
“It also, in part, explains the central bank’s ability to have built up over $6 billion in FX reserves since November, to $30.3 billion (30-day Moving Average) on 23 March,” RenCap said in the report.