• Caution central bank on maturing FX forwards, oil price volatility
• Bank pumps another $185m into market
Financial market analysts have welcomed Monday’s decision by the Central Bank of Nigeria (CBN) to lower the naira exchange rate for retail invisibles such as business and personal travel allowances, school fees and medical fees to N360 to the dollar, from N375.
Describing the move as a show of strength by the central bank and its capacity to defend the naira, they however cautioned the bank to be conscious of its maturing obligations and potential risks in the global market, especially volatile crude oil prices.
Desirous of alleviating the pains of retail foreign exchange consumers, the CBN directed all banks to immediately begin the sale of FX for business and personal travel allowances, and tuition and medical fees to customers at not more than N360 to the dollar.
The CBN, in a note, explained that it would sell to commercial banks at N357 to the dollar, adding that banks were expected to post the new rates in the banking halls of their branches immediately.
In line with the new directive, the acting Director, Corporate Communications, CBN, Mr. Isaac Okorafor, said the bank would send examiners to commercial banks to ensure the new rates are implemented.
“Banks are prohibited from selling FX funds meant for invisibles to BDCs,” he added.
The CBN also intervened in the FX market with $185 million.
A breakdown showed that it offered $85 million to banks at the rate of N357/$1 for onward sale to retail end users at not more than N360/$1 for invisibles, while $100 million was sold to authorised dealers in the interbank window to meet the requests of wholesale customers.
Reacting to the directive on the sale of FX for retail invisibles, an analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, described it as a show of strength by the CBN.
“It also shows that they are winning the battle. I now think that when the CBN talked about creating an exchange rate convergence, it was actually referring to the rate for invisibles.
“So, what the CBN has done is to show its capacity to defend the naira. But we expect the CBN to now push through with liquidity,” he added in a phone interview.
Ezun, however, expressed reservations about how much support the CBN would be able to give the naira, saying: “When the external reserves begin to drop, it would raise a red flag.”
The chief executive of Financial Derivatives Limited, Mr. Bismarck Rewane, who also welcomed the revaluation of the rate for PTA and others, said maturing FX forwards should also be of concern to the CBN.
“We must remember that the FX forward contracts would start maturing as from tomorrow (Tuesday). Forward contracts are posted-dated cheques and when they start maturing is when we would start seeing the effects of the intervention on the reserves.
“I think if for anything, we should be using this opportunity to find a fair value for the naira because oil prices have come down and forward contracts are maturing,” Rewane said.
According to him, by adjusting the rate for such invisibles, “the CBN is just subsidising Nigerians”.
“This could lead to a crisis of false expectations. Rather than move the rate up, what I expected the CBN to do was to open up the market, remove all the restrictions and you will see that the currency will find its real value.
“So, first of all, it is a good move, but it is better to be cautiously optimistic rather than getting carried away,” Rewane stated.
The Chief Executive of Cowry Asset Management Limited, Mr. Johnson Chukwu, who also welcomed the adjustment of the naira for retail invisible, said it was a demonstration of the CBN’s capacity to defend the naira.
“I think before the CBN came out with this, it must have measured its capacity to support the naira. Luckily for the CBN, there is tight naira liquidity in the market and that does not encourage speculative activities.
“People do not have cash to buy dollars to hold anymore and that has supported the naira. The key thing is that as the CBN continues to pump dollar liquidity, it would force more people holding dollar positions to sell and that would definitely help the market.
“For now, a lot of people holding dollars are looking for ways to exit,” Chukwu said.
The naira traded at between N385 and N390 to the dollar at some parallel market points in Lagos on Monday.