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How I&E forex window buoyed naira stability with $50bn inflows

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By Babajide Komolafe
Foreign exchange inflows through the Investors and Exporters (I&E) foreign exchange window hit the $50 billion at the end of February. This huge inflow was instrumental to the  stability of the  naira against the dollar since 2017.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

The Investors and Exporters (I&E) forex window allows investors and exporters to purchase and sell foreign exchange at the prevailing market rate.  Prior to the introduction of the I&E window on April 2017, the nation’s foreign exchange market was bedevilled with acute shortage of supply of foreign exchange due to apathy of foreign investors  who exited the nation’s financial markets in droves in the wake of the sharp decline in the nation’s external reserve caused by sharp decline in crude oil prices between starting from July 2014. The scarcity triggered sharp depreciation of the naira with the exchange rate rising to N520 per dollar in February 2017, while the gap between the official exchange rate and the parallel market rate rose to 70 percent.

The I&E forex window was introduced to address these challenges. According to the CBN, the objective of the window is to boost liquidity in the foreign exchange market and ensure timely execution and settlement for eligible transactions. In a circular issued on April 21, 2017 introducing the window, the CBN stated that,   “Eligible transactions in the window include: Invisible transactions (excluding International Airlines Ticket sales’ remittances), Loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management services fees, consultancy fees, etc; Bills for collection and; Any other trade-related payment obligations (at the instance of the customer).”

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The apex bank further stated that, “The supply of foreign currency to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to Naira. The CBN shall also be a market participant at this window to promote liquidity and professional market conduct.”

Transactions in the window commenced on Monday April 24, while the FMDQ introduced the Nigeria Autonomous Foreign Exchange Rate (NAFEX) as reference rate for the window.

Cautious Optimism

However the introduction of the I&E forex window was greeted with cautious optimism and  apprehension due to liquidity concerns and sustainability of the structure of the market. In addition to these was  anxiety over the direction of exchange rate in the market.

This attitude was informed by the 22.6 percent depreciation suffered by the naira in the window in the first week of trading.

Compared to the official exchange rate of N305 per dollar, NAFEX opened at N374.25 per dollar and closed at N374.96 per dollar, hence 22.6 per cent naira depreciation in the first day of trading. By the close of the first week, the naira suffered further depreciation in the window with NAFEX rising further to N379 per dollar.

The mood among banking experts was captured in a commentary on the introduction of the window,  by Ecobank research analysts, Mr. Kunle Ezun and Mr.    Kenneth Asenime. They noted: “In the immediate, forex  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 naira.

“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.”

Also speaking at the Access Bank FX2017 seminar, which focussed on the introduction of the I&E forex window, Access Bank’s Group Managing Director/Chief Executive, Mr. Herbert Wigwe said: “We as regulators, market participants and businesses should sit down together to understand the modus operandi of the recently introduced forex markets and how it will impact on our businesses going forward.”

Naira stable at N358/$ in parallel market



“We are beginning to see inflows  into the market, it is still very early days yet, but at least  we are beginning to see semblance of inflows. We  must work together to strengthen  this market in which we do business.”

However within one month of its introduction the I&E forex window gained confidence and credibility due to transparency of its operations visi-a-vis the determination of the ruling exchange rate, with the volume of dollars traded in the window rising  to $1 billion per week in the first month of its introduction.

This led to  commendation by global rating agency, Fitch Ratings, which stated:  “NAFEX provides investors and exporters with a more transparent mechanism through which they can sell foreign currency  to willing buyers. Authorised banks act as intermediaries, clearing funds supplied by portfolio investors and exporters and ensuring timely execution of settlement for buyers. “Despite its short record, volumes transacted through NAFEX are growing. In our opinion, NAFEX offers a more transparent alternative to accessing FC than is available through the other foreign-exchange markets in the country. Several exchange rates operate in Nigeria.”

Performance and Impact

Vanguard analysis showed that the  foreign exchange inflow through the I&E forex window  has been growing. From April 2st  when the window commenced operations to December 31st 2017, $24 billion was traded in the window, while foreign investors, exporters and other non CBN players injected $6 billion.

Further analysis showed that in 2018, the I&E forex window attracted $33.34 billion inflows with, foreign investors, exporters and other non CBN players injecting $23.89 billion.

The impact of these huge inflows is reflected in the steady increase in the nation’s external reserves. From $30.8 billion at the end of April 2017, a week after the I&E forex window was introduced, the reserves rose steadily to a peak of $48 billion at the end of May 2018.

The steady growth in the nation’s external reserves also led to appreciation of the naira in the nation’s foreign exchange market, which culminated to the convergence of the parallel market exchange rate and the I&E forex window rate  within the first six months of  the window.

Responding to increased dollar supply to bureaux de change (BDCs) by the CBN, the naira appreciated to N360 per dollar on Friday November 2nd, 2017 from N390 per dollar at the end of April.  On the same day   I&E forex window exchange rate dropped to N360.57 per dollar, from the opening rate of N374.25 on April 24th, 2017, implying convergence of the exchange rates.

Since then the naira exchange rate has been stable within the range of N360 per dollar and N363 per dollar in the parallel market and in the I&E forex window.

Another  beneficiary of the I&E forex window is the Nigerian Stock Exchange (NSE). Between 2014 and April 2017, the NSE All-Share Index lost 40 of its value due to exit of foreign investors from the stock market. The introduction of the I&E window however encouraged foreign investors to return to the stock market. As a result the NSE All-Share Index gained 39 percent three months after the window was introduced, and by the end of 2017 the index had surged 42 percent.

Analysts comment

In an interview with Vanguard Newspaper, Managing Director/Chief Executive, Financial Derivatives Company Limited, Mr. Bismarck Rewane commended the  I&E forex window. He said: “Compared to where we were before the I&E window, I think the I&E window has done very well. It is the most efficient of the current dispensation.  However, if we want an ideal situation it should be that we should head towards an efficient market structure and an efficient rate. The I&E window is nearest to an efficient rate but it is not the answer to a market structure.”

President Association of Bureaux De Change Operators of Nigeria (ABCON), Dr. Aminu Gwadabe also commended the I&E forex window saying, “The window has impacted positively on increasing level of investors’ confidence in the nation’s foreign exchange market. It has also helped to deepen the foreign exchange market and increased liquidity.”

On their part, analysts at Vetiva Capital Management Limited opined that the I&E forex window played a critical role in the nation’s recovery from economic recession.  “The NAFEX fixing has been a boom to Nigeria’s forex market, boosting liquidity and price discovery, but also fostering investor confidence in the economy. The improvement in the forex market has been a critical element of Nigeria’s economic recovery”, they said.

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