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Investors inject $22bn in I&E as external reserves rise by $12bn

Pre-election activities dominate analysts’ outlook for 2018

By Babajide Komolafe

INVESTORS injected about $22 billion into the Investors and Exporters (I&E) window, prompting the nation’s external reserves to record the first annual increase in five years of  $12 billion in 2017.

The I&E window was introduced by the CBN on April 21 as part of efforts to deepen the foreign exchange (forex) market and accommodate all forex obligations. The purpose of the window is to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.

CBN Headquarters

Consequently the Financial Market Dealers Quote (FMDQ) introduced a reference exchange rate for the window known as  the Nigeria Autonomous Forex Exchange  Rate Fixing (NAFEX), published 12 noon every day.

Financial Vanguard analysis revealed that investors injected $3.3 billion into the I&E window in December. Also, the CBN disclosed that investors had injected $18.7 billion into the window between April 21 when it was introduced and  November 21. Combined together, this indicated that investors injected about $22 billion into the window from April 21 to December 29, which was the last trading day of the year.

The injection according to the CBN was buoyed by investors’ confidence in the window. “The Committee viewed with satisfaction, the growing patronage at the Investors’ and Exporters’ (I&E) window of the foreign exchange market and attributed the development to increased confidence by foreign investors and the preference of Nigerian investors’ and exporters’ for the window compared with all other windows. The MPC noted that the I&E window had increased liquidity and boosted confidence in the market with over $18.70 billion in transactions since its introduction in April 2017″, said CBN Governor, Mr. Godwin Emefiele at post  MPC meeting  press conference held on November 21st.

Meanwhile the nation’s external reserve recorded its first annual increase in five years  in 2107. Data posted by the CBN on its website revealed that the external reserves rose by $11.93 billion or 46 percent to $38.73 billion as at Thursday December 28th  from $25.85 billion on December 30, 2016.

The last time the reserves recorded annual increase was 2012, when it rose by $11.21 billion or 34 percent to $32.64 billion. Since then reserve suffered steady decline occasioned by falling  crude oil prices, fiscal depletion of the excess crude reserves and capital flight by portfolio investors.

Consequently the external reserves dropped by  2.2 percent to $42.85 billion  in 2013;  by 20 percent  to $34.24 billion in 2014; by 17 percent to $28.29 billion in 2015 and by 8.7 percent to $25.85 billion at the end of 2016.

Cumulatively, the reserves fell by 41 percent or $18 billion during the five years of decline.

Naira appreciates in forex markets

Buoyed by weak dollar demand due to the Yuletide holiday, the naira closed the year on a positive note as it appreciated significantly in the parallel market and in the I&E window.

The naira appreciated by 98 kobo in the I&E window to N360.33 per dollar at the close of trading on Friday, from N361.31 per dollar the previous week.

Financial Vanguard analysis revealed that from April when the NAFEX was introduced till last Friday, the naira appreciated by 37 percent or N13.92  in the I&E window. From    N374.25 per dollar when the NAFEX was introduced, the naira appreciated steadily to N360.33 per dollar last week.

In the parallel market, the naira appreciated by N2 naira to N363 per dollar from N365 per dollar the previous week.

Further analysis revealed that the naira appreciated by 26 per cent in the parallel market in 2017. The parallel market exchange rate opened the year at N490 per dollar on January 3rd, 2017, rose sharply to N520 per dollar on February 21st, but commenced steady decline to N363 per dollar last week, in response to CBN’s weekly intervention in the foreign exchange market, via the interbank foreign exchange market and dollar sales to bureaux de change (BDCs).

Pre-election activities dominate analysts’ outlook for 2018

Analysts have expressed concern over the likely impact of pre-election activities to influence direction of inflation, exchange rates and  macroeconomic performance in 2018.

According to analysts at Lagos based Financial Derivatives Company Limited: “2018 will be different in many ways. One of the reasons is that it is the penultimate year to the elections in 2019. The New Year will be split into two halves. The first half will be characterized by economic and policy actions. The second will be Politics! Politics!! Politics

“Inflation due to political campaigning that will take effect fully in 2018, we anticipate an increase in the level of money supply, at a growth rate of 5 -10 percent. Broad money supply contracted by 11.06 percent  in 2017 due to tight liquidity conditions. Also, the likely review of the minimum wage (currently at N18,000) and other social intervention programs by the government will exacerbate inflationary pressures in 2018.

“Economic and policy decisions will be influenced by political motives. Nonetheless, the economic recovery recorded in 2017 will be sustained in 2018 however at a slow pace of 2.2 percent.

Expressing similar sentiments, analysts at Lagos based Vetiva Capital Management Company said: “Nigerian economy is set to expand further in 2018, bolstered by increased production in the oil and agriculture sectors. Growth in the real sector should be supported by the tag-team of lower inflation and lower interest rates, as well as continued stability in the forex  market and another attempt at fiscal stimulus. However, challenges abound, particularly pertaining to persistently weak consumer demand and an itchy investment climate ahead of the 2019 elections. With a base scenario of moderate economic disruption from political activities in the year, we still anticipate growth drivers to be more significant in 2018 – Gross Domestic Product (GDP) growth forecast: 2.0 percent year-on-year (y/y). Should the political landscape remain stable for most of the year, and fiscal and monetary stimulus unleashed to a material effect, we estimate a 2.9 percent y/y growth for the year. On the other hand, our bear scenario projects an full year 2018 (FY’18) GDP contraction of 0.3 percent y/y, under the assumption of high political uncertainty and an adverse shock to oil output.”


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