By Babajide Komolafe

THE intervention of the Central Bank of Nigeria (CBN) in the foreign exchange market will this week rise to $4.6 billion, with foreign exchange (forex) operators apprehensive over the new forex window for investors and exporters.

Vanguard analysis revealed that from Tuesday, February 21, when it commenced intervention in the forex market, to last week Friday, the CBN had intervened 22 times and sold $4.44 billion, translating to an average of $202 billion for each intervention. This is beside dollar sales to bureaux de change and special dollar sales to the real sector. This trend is expected to continue this week hence increasing the dollar sales to $4.6 billion.

Meanwhile, there is apprehension over the newly introduced Investors and Exporters forex window (IEFW) due to liquidity concerns and sustainability of the structure of the market. In addition to these is anxiety over the direction of exchange rate in the market.

Emefiele CBN Governor

Activities in the IEFW commenced on Monday with the Financial Market Dealers Quote (FMDQ) introducing the Nigeria Autonomous Foreign Exchange Rate Fixing (NAFEX), a benchmark rate for the new market. Actual trading began on Tuesday with the CBN intervening in the market with $25 million.

Data from the FMDQ showed that the naira suffered 34 per cent depreciation in the market in the first week of trading. Compared to the interbank exchange rate of N305 per dollar, NAFEX opened on Tuesday at N374.25 per dollar and closed at N374.96 per dollar, hence 22.6 per cent depreciation. The naira suffered further depreciation in the market with NAFEX rising further to N379 per dollar at the close of business on Friday.

Despite commending the introduction of the IEFW, foreign exchange dealers and analysts have expressed concerns over its sustainability.

In a commentary on the introduction of the window, Ecobank research analysts, Mr. Kunle Ezun and Mr. Kenneth Asenime noted: “In the immediate, FX supply to the market is expected to rise, possibly by around 75 per cent, as portfolio Investors and Exporters (who hitherto are not disposed to the official market due to pricing) re-enter the market, which in turn will improve liquidity and strengthen the NGN.

“However, the lack of communication on the restricted items on the exclusion list could further limit the positive impact introduced by the regulatory change on the market, requiring another regulatory change by the CBN to correct imbalances. Over all, the impact of the circular would largely depend on how much flexibility, transparency and liquidity the CBN is willing to inject to support the FX spot market. As such, the CBN might need to intervene more in the interbank FX spot market and other segments of the FX market.”

Liquidity and depth of the window

While commending the initiative noting that it will boost liquidity in the market, analysts at Financial Derivatives Company (FDC), however, opined that: “While the quantity supplied has increased, the initiative further segments the market, resulting in multiplicity of rates. None-the less, Nigeria is getting closer to a price discovery path.”

Analysts at Afrinvest Plc, a Lagos based investment firm on the part said that the naira might depreciate further in the IEFW this week. “We do not rule out a further depreciation in rates at the Investors & Exporters Window as investors test the liquidity and depth of the window.”

In a comprehensive review of the window, they stated: “The implementation of the IEFW since the market first opened for trading on Monday has been largely inspiring as our interactions with dealers suggest that rates have been independently determined by market forces through willing counterparties (buyers and sellers) though liquidity is still a constraint as participants are still trying to study the operational framework, depth and sustainability of the market structure.

“Of particular concern is that oil exporters and International Money Transfer Operators (IMTO’s) are exempted from supplying currency in the window – oil exporters are matched to petroleum marketers while IMTO’s have a separate market with a different pegged FX rate.

“Nonetheless, our conversations with dealers suggest there is still much to cheer and we focus on the positives. Dealers have clearly noted that price-discovery is indeed happening in the window, with naira offer rate from foreign portfolio investors (FPI)  looking to invest in Naira assets trending downward from initial N420 to N410  range at the start of the week to a range of N375 to N395 at Friday close of trade.”

Uncertainty over direction of cost of funds

There is uncertainty over direction of cost of funds in the interbank money market this week. Last week, short term cost of funds crashed to 4.0 per cent due to inflow of  N533 billion comprising  N480.0 billion from maturing FGN bonds and N53.0 billion from matured  OMO treasury bills, which hit the market on Thursday. As a result, market liquidly rose from minus N151 billion at the beginning of the week to N2447 billion at the close of the week. Reflecting the impact of the inflow interest rate of Colateralised (Open Buy Back, OBB) and Overnight lending dropped to 4.0 and 4.75 per cent on Friday from 27.5 per cent   and 29.7 per cent the previous week.

This week the market is expected to experience inflow of about N450 billion, comprising N150 billion from matured treasury bills and over N300 billion from statutory allocation fund.

Analysts were however divided on how these inflows will impact cost of funds. According to analysts at Cowry Assets Management Plc, a Lagos based investment firm:  “With the net inflow from maturing treasury bills and Federation Accounts Allocation Committee ( FAAC)  inflows expected to settle in this week, we expect downward pressure on the interbank rates.

Afrinvest analysts however stated: “In the week ahead, we expect debits from successful bids at FX whole sale intervention auctions as well as OMO auctions to drag liquidity. The CBN will also be conducting a T-bills auction of net N150.6bn but its impact on liquidity is expected to be taped by a scheduled maturity of the same amount. Accordingly, we expect money market lending rates to trend northward from current levels,” they stated.

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