FX Arbitrage Widens to N206/$1 Enabling Round-tripping, CBN Vows Crack Down

•I& E window: N744/$1; parallel market: N950/$1 

•Shonubi says Tinubu “very concerned” about naira slide

•Reveals intervention measures ready in matter of days 

•Report: Dollar supply remains major challenge in FX market

Deji Elumoye, James Emejo in Abuja and Nume Ekeghe in Lagos

The naira yesterday depreciated at both the official Investors and Exporters’ (I&E) window and the parallel market, with the arbitrage gap now at N206/$1, thereby enabling round tripping, one of the reasons President Bola Ahmed Tinubu told Nigerians in Paris, that the suspended Governor of the Central Bank, Godwin Emefiele was arrested.

This effective dual exchange rate emerged just as the acting Governor of Central Bank of Nigeria (CBN), Mr. Folashodun Shonubi, yesterday, warned that the government would come down hard on currency speculators and others involved in underhand undertakings in the foreign exchange market, including the parallel market.

The wide gap between the I&E Window and the parallel market enables round-tripping as dealers buy the greenback at the official window at N744 to a dollar and then sell at the black market at N206 spread, thus encouraging rent-seeking. A dealer who declined to be named told THISDAY yesterday that the growing gulf between official and parallel market makes it attractive to round trip. “As things stand now, it is very attractive to buy dollar from the official window and then go straight to the parallel market and sell at a higher price, making N206 or more in profit on each dollar. You can’t make that kind of profit from manufacturing. Inflation will erode your profit,” the dealer declared.

The President had  during an interactive session with Nigerians residing in France and neighbouring countries, said the financial system was rotten under Emefiele.

He said “Then the financial system was rotten. Few people made bags of money and then you yourself, you stopped sending money home to our poor parents. Several windows. But that is gone now. It’s gone.

“The man is in the hands of the authorities. Something is being done about that. They will sort themselves out.”

THISDAY checks at some parallel market points in Lagos State showed that the naira weakened by N20 to N950/$1 yesterday, lower than the N930/$1 it closed last Friday.

The official I&E window, which had opened trading yesterday at N740/$1, marginally depreciated by N4 at the close of the day to N744/$1. With this, the gap between the parallel market and the official I&E window has now gotten to a historic high since the FX reforms, to N206/$1.

However, Shonubi gave the warning to crackdown on speculators when he addressed newsmen, after meeting with President Bola Tinubu at State House, Abuja.

The meeting followed the downward slide in the naira exchange rate to the dollar, which Shonubi said the president was worried about. The acting CBN governor expressed the apex bank’s readiness to reverse the glide, saying it has lined up intervention measures that would be unveiled in the next few days.

Shonubi said Tinubu was concerned about the development in the FX market and its effect on the people, saying he discussed with the president what can be done to stabilise the naira.

Shonubi noted that the changes going on in the parallel market were not dictated by real demand, but the speculative attitude of some dealers. He warned that the speculators would suffer huge losses when government activates its strategies.

Shonubi stated, “Mr. President is very concerned about some of the goings on in the foreign exchange market.

“One of the things we discussed is what could be done to stabilise and what could be done to improve the liquidity in the market and also the goings on in the various other markets, including the parallel market.

“He (Tinubu) is concerned about its impact on the average person, since, unfortunately, a lot of activities that we do, which are purely local, are still referenced to exchange rates in the parallel market.

“We’ve discussed and I’ve shared with him what we’re doing to improve supply.”

The acting CBN governor explained further, “If you look at the official market, you’ll find that market has been fairly stable and the spread of the difference has not fluctuated as much.

“We do not believe that the changes going on in the parallel market are driven by pure economic demand and supply, but by speculative demand from people.

“Some of the plans and strategies, which I’m not at liberty to share with you, means sooner rather than later, the speculators should be careful because we believe the things we’re doing, when they come to fruition, may result in significant losses to them.

“But my presence here is more about the concerns the president has and he needs to know that we are doing something about it, assurances of which I have given him totally.”

He added, “So I hope this helps. We are looking at it and we’re doing things, which will significantly impact the market in a few days’ time and we will all see it.

“The intention is to ensure the environment operates at a level that’s more efficient, but also that is very reasonable and does not have a negative impact, to the best that we can, on the life of the average person.”

Report: Dollar Supply Remains Major Challenge in FX Market

Meanwhile, a report identified inadequate dollar supply as the key challenge in the country’s foreign exchange market, following recent floating of the naira.

It noted the widening gap between the official exchange rate and the parallel market.

The report authored by the Standard Bank Research (SBR), a subsidiary of Standard Bank Group, further stated that while the recent monetary policy actions of the CBN reinforced a continued progression towards a monetary policy stance that better aligned with the challenges of excess naira liquidity and demand for the US Dollar, more needed to be done by the monetary authority.

The report, however, maintained its forecast for the USD/NGN at N750 by year-end.

The SBR further maintained that despite persistent increases in policy rate, monetary policy transmission had remained weak.

It urged the CBN to use more potent tools, such as shorter-dated, high-yielding OMOs, and increase commercial banks’ capacity to invest in the Standing Deposit Facility.

The report added, “These measures have the potential to increase yields at the front end of the treasury curve enough to attract USD inflows from foreign portfolio investors, thus, bringing the FX market closer to equilibrium.”

It also pointed out that post-2020, the frequency of Open Market Operations (OMO) auctions has been relatively limited, partly resulting in sustained lower levels of short-term interest rates.

The report added that a higher frequency and magnitude of the auctions should further tighten naira liquidity in the system.

On monetary policy normalisation, the report described the CBN’s issuance of OMO bills for the first time in the year as another step in the right direction. It however, noted that the OMO issuance notwithstanding, “Interest rates are probably still too low to incentivise an increase in USD supply from locals or foreign portfolio investors (FPIs).

“For the former, negative real interest rates are around 12 per cent for 1-y T-Bills and 9 per cent for 1-y OMOs. For the latter, our informal surveys suggest 1-y T-Bill or OMO yields of between 15 per cent and 20 per cent would be required to make the NGN carry trade attractive again.

“Policy normalisation is often used to respond to rising inflation through tightening of financing conditions by raising key interest rates, among other things.

“Central banks are shifting from unconventional monetary policy measures towards conventional interest rate policy – to tighten monetary policy are therefore visible as an increase in the general level of interest rates.”

On his part, Senior Market Analyst at FXTM, Lukman Otunuga, lamented that the naira took another beating on the black-market exchange.

Otunuga stated, “Should the current themes negatively impacting the naira remain present, prices may hit N1000 in a matter of time. Such a development that will most likely increase the cost of living and squeeze households further in the short to medium term.

“Outside of Nigeria, we have witnessed how higher interest rates have somewhat capped and controlled inflation, albeit at a price.

“Dollar weakness could become a major theme in the second half of 2023 as the Fed concludes its hiking cycle.”