July 6, 2020

Industries hard hit as COVID-19 rattles forex market


· I&E falls 22% to $22.99b · External reserves down 17%
· Naira depreciates 27% · Corporates besiege black market for forex needs

By Babajide Komolafe and Elizabeth Adegbesan

Nigeria’s industries ended the first half of 2020 groaning under the weight of acute dollar scarcity triggered by the severe, multiple impacts of the Coronavirus (COVID-19) pandemic on the nation’s foreign exchange market.

The pressure on the market has resulted into a cumulative 22 per cent fall in volume of dollars traded in the Investors and Exporters (I&E) window, and 27 per cent depreciation of the Naira to N458 per dollar in the parallel market.

The I&E window is the market where private sector owned foreign currencies are traded with mostly foreign investors and exporters offering their foreign currencies to end-users, mostly importers at market determined exchange rate under the supervision of the Central Bank of Nigeria, CBN.

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The sharp depreciation of the Naira in the parallel market has been heightened by huge demand for foreign exchange by corporate organisations, due to inability to get adequate supply from the I&E window and the retail forex auction of the CBN.

The plight of the corporates in the forex market was further worsened last weekend when the CBN signal its decision to devalue the naira by 5.5 percent  to N380 per dollar at its retail forex auction held last week, from N360   per dollar in the previous bid.

The retail market is the secondary market intervention sells, SMIS, run by the CBN.


I&E turnover falls 22% to $22.99bn

The volume of dollars traded (turnover) in the I&E window of the foreign exchange market fell by 22 per cent, year-on-year to  $22.99  billion in the first half of the year (H1’20) from  $29.32  billion in H1’19.

However, turnover in the I&E fell by 24 per cent when compared with the $30.32 billion traded in the second half of 2019 (H2’19).

The sharp decline in turnover reflects the severe impact of the COVID-19 pandemic on the foreign exchange market, especially decline in dollar inflow from Foreign Portfolio Investors, FPIs due to COVID-19 pandemic worldwide.

Financial Vanguard  analysis of monthly turnover in the I&E window showed that turnover dropped by six per cent in January 2020 to  $5.6 billion from  $5.3 billion in December 2019.

In February 2020, turnover rose by 31 per cent to  $7.34 billion and up by 3.0 per cent to $7.55 billion in March.

However, turnover fell sharply by 88 per cent to  $873.96  million in April and down by another 30 per cent to  $612.45  million in May.

But turnover ticked up in June by 62 per cent to  $992.12  million, reflecting the gradual easing of lock-downs across global economies.


Naira depreciates

Further analysis showed that naira, in the H1’20 depreciated in the I&E by 6.2 percent or N22.64 as the indicative exchange rate of the window rose to N386.50 per dollar on 30th of June from N363.86 per dollar in December 2019.

Financial Vanguard  analysis of weekly turnover in June showed that $288.28 million was traded in the first week of June. Turnover declined by 58 per cent to $121.2 million in the second week and up by 45 per cent to $175.69 million in the third week.

But the upward trend was sustained in the fourth week as turnover grew by 54 per cent to  $269.69 million.

Also owing to the effect of the COVID-19 pandemic, the naira suffered a 27 per cent depreciation in the parallel market in H1’20, following intense dollar scarcity prompted by the suspension of dollar sales to bureaux de change (BDC) operators by the CBN.

The apex bank on March 20th, 2020, announced two weeks suspension of $80,000 weekly dollar sales per BDCs. But more than three months after, the apex bank is yet to resume sales to the BDCs, a situation which, according to industry operators, has resulted in acute dollar scarcity in the market. Consequently, the exchange rate skyrocketed to N458 per dollar in H1’20 from N361 per dollar at the end of 2019. This translated to 27 per cent or N97 per dollar depreciation in six months.


Corporates besiege black market

The sharp depreciation of the Naira is heightened by the influx of dollar demand from corporate organisations, due to inability to source dollar from the I&E window and the retail forex auction of the CBN.

For example, the apex bank last month returned N338 billion paid by bank customers to buy dollars in its retail foreign exchange auction, a situation that indicates unwillingness to further use the nation’s declining external reserves to meet dollar demand from end-users.

In response, bank customers, mostly corporate customers descended on the parallel market to source for their dollar needs.

Confirming this development to  Financial Vanguard,  an official of one of the companies affected, a pharmaceutical firm, who spoke on condition of anonymity, said: “We could not get all the dollars we needed from the official market and we have to source for the balance in the black market. But we did not get enough in the black market to cover for the balance even when we were willing to pay N461 per dollar.”

Speaking further, the official said the dollar scarcity and depreciation of the naira has compelled the company to increase price of its products twice in one month, in a bid to cover its cost”.


External reserves down

Meanwhile, the nation’s external reserves, less the credit support to the Federal Government from the World Bank and the International Monetary Fund (IMF), fell by 17 percent in H1’20.

Recall that the IMF in April granted Rapid Support Facility (RSF) of $3.4 billion to Nigeria to assist in ameliorating the impact of the COVID-19 pandemic on the economy.

Similarly, the World Bank last month granted $750 million loan to the government to support the nation’s power sector.

But for this credit support, the nation’s external reserves would have fallen by $6.55 billion in the first half of the year to $32.05 billion at the end of June from $38.59 billion at the end of December 2019.

However, due to the credit support from IMF the external reserves ended the H1’2020 at $36.19 billion, representing 6.2 per cent decline from $38.59 billion at the end of December, 2019.

While external reserves had been on the downward trend since end of June last year, the decline was worsened by the impact of the COVID-19 on the price of crude oil, which accounts for 90 per cent of the nation’s dollar earnings.

The sharp fall in global demand for crude oil due to COVID-19 induced shut-down in most countries, as well as the battle for market share among major oil producers, caused price of crude oil to fall below $10 per barrel in April (from above $70 per barrel in January) before rising steadily to close at $40.32 per barrel last week.

COVID-19 also triggered exit of offshore investors from Nigeria’s fixed income market, resulting to dollar outflow of $3.5 billion through the I&E window in March.