I&E Forex window, CBN’s role to keep naira stable

With about $60 billion turnover in 21 months, the Investors’ and Exporters’ (I&E) Forex Window launched by the Central Bank of Nigeria (CBN) in April, last year, has surpassed stakeholders’ expectation. The window is not only a boost to forex liquidity, but has helped to keep the Naira stable at the official and parallel markets, writes COLLINS NWEZE.

Not many investors – local and international – gave it any chance to succeed when it was introduced. But, 21 months after, the Investors’ and Exporters’ (I&E) Forex window, launched by the Central Bank of Nigeria (CBN), has attracted nearly $60 billion to the economy and is one of the key instruments expected to help stabilise the local currency against other currencies in the New Year.

The weekly dollar interventions by the bank is also expected to help in stabilising the local currency. The CBN also injected over $10.97 billion into the foreign exchange market between January and October, last year to defend the nation’s currency, the naira, against other major currencies, including the United States dollar.

The $10.97 billion was based on weekly compilation of amounts released by the apex bank to boost liquidity in the foreign exchange market. The CBN’s interventions have helped to keep the local currency stable and is expected to continue in the new year.

A report by FSDH Research said that prior to the I&E Forex window introduction in April, last year, the market and exchange rates were in turmoil. However, in a dramatic turn of events, the acute shortage of forex, which businesses and individuals grappled with, witnessed an unprecedented improvement, with banks and Bureaux de Change (BDCs) now desperately looking for forex buyers.

The FSDH Research Monthly Economic and Financial Market Outlook said  the  positive  domestic  and  external  environment  will  further lead  to  external  reserves accretion  in  the  short-term, a development the report predicted will further stabilise  the foreign exchange rate.


Defending the Naira

The CBN injected over $10.97 billion into the foreign exchange market between January and October, last year, to defend the nation’s currency, the naira, against other major currencies, including the United States dollar.

The $10.97 billion was based on weekly compilation of amount released by the apex bank to boost liquidity in the foreign exchange market.

The CBN usually intervenes in the foreign exchange market by injecting liquidity about three times a week.

The intervention is provided to authorised dealers in the wholesale segment of the market as well as other sectors of the economy such as agriculture, manufacturing and the Small and Medium Enterprise segment.

Customers that required foreign exchange for invisible things such as tuition fees, medical bills and Basic Travel Allowance are also allocated funds from the intervention.

An analysis of the weekly intervention shows that the apex bank injected about $1.2 billion in January while February, March and April had $1.49 billion, $1.38 billion and $1.03 billion, respectively.

The CBN’s intervention in the month of May was estimated at about $1.06 billion; June, $1.29 billion, while July had $970 million among others.


Before I&E Forex window

Before the introduction of the forex window, the local equities market and the foreign exchange (forex) market were in shambles.  The All Share Index (ALSI) was continuously shrinking and the naira weakened against other currencies, especially the dollar.

The I&E window has become the attraction, making many of the business concerns to take another look at their exit from the country.

The introduction of the window was followed by continuous interventions by the CBN which enabled banks and BDC operators to meet forex demand at the retail end of the market. Thus, the window has become a life-saving pill for the domestic economy as it has attracted about $60 billion into the market, enhanced transparency and made forex available to the end-users.

The operations of companies, especially manufacturing, has been on the upward swing with an improvement in inflation figures as well as equities market performance.

According to the CBN Director in charge of Financial Markets, Alvan Ikoku, the “Investors’ & Exporters’ FX Window” is boosting liquidity in the forex market and ensuring timely execution and settlement for eligible transactions by all parties.

Before the stability in the forex market and naira, the economy witnessed a depressed Gross Domestic Product (GDP) growth, which culminated in a recession in 2016.

“There was also rising inflation, which peaked at almost 19 per cent in January 2017 and a persistently rising unemployment rate to 14.23 per cent in 2016 fourth quarter from 6.41 per cent as at 2014 fourth quarter. There was also a significant depreciation of the exchange rate, reaching N525 to $1 in February 2017 and witnessed a fast depletion of the reserves which was drained down from about $23.6 billion in October 2016 from as high as $40 billion in January 2014.

“The I&E Forex window, seen as a ‘willing buyer, willing-seller window’, allows foreign investors to bring in dollars into the economy at any price of their choice, provided they could find buyers at such rate. The figure at the window has also impacted positively on the Purchasing Managers’ Index (PMI).”

A  Lagos-based economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, described the introduction of the I&E forex window as the best policy implemented by the CBN.

Speaking on the issue, CBN’s Director, Corporate Communications, Isaac Okorafor, reiterated the bank’s commitment to ensure adequate forex supply to genuine customers to achieve the goal of forex rates convergence.

Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investors’ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.

Before the introduction of the window, foreign investors’ appetite for local assets waned significantly on the back of currency crisis which in turn fundamentally weakened macroeconomic performance, dragged corporate earnings and also impacted on equities market viability.

According to the CBN spokesman, forex supply to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to naira. The apex bank is a market participant at the window to promote liquidity and professional market conduct.

He said that the apex bank assured that the exchange rates of the transactions would be as agreed between authorised dealers and their counterparties.

Besides, he said the regulator reserved the right to intervene as a buyer or seller, as it deems fit, in the window, even as information on transactions between authorised dealers is reported to the CBN on a daily basis. Manufacturers and other foreign exchange (forex) end-users also seem to be having a great time over the coming of the window.

Barely a month after trading at the window commenced operation, international credit rating agency, Fitch Ratings, released a report, stating that the establishment of the I&E Forex window had led to an improvement in banks’ forex liquidity situation.

The naira has been stable at the official and parallel markets, with the foreign exchange (forex) reserves standing at $47.6 billion, a report by Exotic Capital, an investment and research firm, has said.

The report said although the level of reserves was still below the record high of $64 billion realised in August 2008, it has nearly doubled the $24 billion recorded in October 2016, increasing by more than $22 billion in 17 months.

“We have written extensively on Nigeria’s multiple exchange rate system and will abstain from further discussion at present, suffice to say that a fairly valued naira at 360 to the dollar combined with high domestic rates has led to a tremendous increase in the level of gross foreign reserves held at the CBN,” the report said.

A similar report by FBN Capital, entitled: “Towards the $50 billion threshold, and counting”, said the rapid accumulation of $15.96 billion over 12 months was due to two sizeable Eurobond launches, a small diaspora bond issue, the recovery in oil export revenues (through the Nigeria National Petroleum Corporation’s share of production and, more recently, the steady bid by the CBN at the I&E Forex window.

The FBN Capital report said: “We should stress that the data are gross and mask the swap transactions the CBN has entered into with local banks. The steady bid by the CBN has been seen variously as a response to the softening of demand for forex by importers and other economic actors, and as a move to contain naira appreciation.


Currency control measures

The CBN has imposed some currency control measures to save the naira. In June 2016, it curbed access to the interbank currency market for importers bringing in a variety of goods. In an effort to conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 41 items, ranging from toothpicks and rice to steel products and private jets.

Other measures it took include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.

The FMDQ OTC Securities Exchange (FMDQ) is an organisation with the strategic intent of bringing about revolutionary changes and fostering the development of the financial markets.

The Naira-Settled OTC Forex Futures are non-deliverable forwards, or a contract where parties agree to an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date. On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The party that would have suffered a loss with the spot forex rate will be paid a settlement amount in naira to ensure that both parties enjoy the rate that had been guaranteed to each other through the OTC Forex Futures.


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