Not many investors – local and international – gave it any chance to succeed when it was unveiled. But, since April 2017, when the Investors’ and Exporters’ (I&E) Forex window was launched by the Central Bank of Nigeria (CBN), it has attracted over $60 billion to the economy and contributed in stabilising the naira.
The economy has also benefited from the CBN policy restricting individuals and non-bank institutions from investing in Open Market Operation (OMO) bills. The policy has made domestic investors to shift from money market to equities market.
OMO is basically designed to be a short-term market instrument that the CBN uses to control the supply of money to the economy. Whenever the CBN believes the inflation rate is high due to increased money supply, it sells OMO bills at high-interest rates mopping up excess liquidity from the economy.
On the flip side, if it believes there is a liquidity squeeze due to high-interest rates, it buys back OMO bills flooding the financial market with cash. These are short-term bills that should not be more than 90 days, except that these days OMO bills are sold with maturity as long as 365 days competing with Treasury Bills.
The Monetary Policy Committee (MPC) members also noted that lower money market interest rates, reflected the liquidity overhang in the banking system, resulting from the restriction of individuals and non-bank corporate in the domestic economy from participating in OMO bill auctions.
Consequently, the monthly weighted average Inter-bank call and Open Buy Back (OBB) rates fell to 3.82 and 3.24 per cent, last December, from 11.42 and 10.73 per cent the previous month.
The Committee noted the improved performance in the equities market, as the All-Share Index (ASI) and Market Capitalisation grew by 11.61per cent and 18.27 per cent, between last October and January 10, this year.
This was indicative of the shift by domestic investors from the money market to the equities market in response to CBN’s policy to restrict their investments in OMO bills auction.
The MPC also noted the improved performance and sustained resilience of the banking system, evidenced by the continued moderation of the Non-Performing Loans (NPLs) ratio from 6.6 per cent last October to 6.1 per cent last December.
The Committee noted that the improvement reflected the CBN’s continued deployment of heterodox policies to ensure that NPLs fell below the prudential benchmark of five per cent.
I&E Forex Window
The I&E Forex window has also remained one of the key instruments expected to help stabilise the local currency against other currencies in this year.
The naira has remained relatively stable at the official and parallel markets. The local currency exchanges at N362 to a dollar at the parallel market and N306 to dollar at the official market.
The I&E Forex Window, seen as a ‘willing buyer, willing-seller window’, allows foreign investors to bring in dollars at any price of their choice, provided they could find buyers. The figure at the window has also impacted positively on the Purchasing Managers’ Index (PMI).
CBN Governor Godwin Emefiele said the I&E Forex window is one of the policies that sustained the stability of the naira and will continue to raise foreign capital inflows into the economy.
At the 54th Annual Bankers Dinner in Lagos at the weekend, Emefiele said as part of the bank’s priorities for next year, the regulator was determined to maintain its stable exchange policy stance in the near-to-medium term given the relatively high level of reserves.
Emefiele, who spoke on the theme: “Delivering a strong sustainable growth for the Nigerian economy”, added that the dollar inflows through the window has supported naira’s stability.
He said: “With a moderated inflation rate, positive Gross Domestic Product (GDP) growth and improvements in our external reserve position, the naira-dollar exchange rate at the I&E Forex window has remained stable for the past 29 months at N360 – $1 and we have witnessed significant convergence in the exchange rate across the various market windows. Local currency has also remained at N306 to dollar at the official market.”
A report by FSDH Research said that prior to the I&E Forex window introduction, the market and exchange rates were in turmoil. However, in a dramatic turn of events, the acute shortage of forex, which businesses and individuals grappled with, witnessed an unprecedented improvement, with banks and Bureaux de Change (BDCs) desperately looking for forex buyers.
The FSDH Research Monthly Economic and Financial Market Outlook said the positive domestic and external environment would further lead to external reserves accretion in the short-term, a development the report predicted will further stabilise the foreign exchange rate.
Defending the Naira
The CBN injected over $10.97 billion into the forex market between last January and October, to defend the naira against other major currencies, including the United States dollar. Similar interventions were made in the market in same period.
The $10.97 billion was based on weekly compilation of amount released by the apex bank to boost liquidity in the forex market.
The CBN usually intervenes in the foreign exchange market by injecting liquidity about three times weekly.The intervention is provided to authorised dealers in the wholesale segment of the market as well as other sectors of the economy such as agriculture, manufacturing and the Small and Medium Enterprise (SME) segment.
Customers that required forex for invisible things such as tuition fees, medical bills and Basic Travel Allowance are also allocated funds from the intervention.
Before I&E Forex window
Before the introduction of the forex window, the local equities market and the forex market were in a shambles. The All Share Index (ALSI) was shrinking and the naira weakened against other currencies, especially the dollar.
The I&E window has become the attraction, making many of the business concerns to take another look at their exit from the country.
The introduction of the window was followed by continuous interventions by the CBN, which enabled banks and BDC operators to meet forex demand at the retail end of the market.
Thus, the window has become a life-saving pill for the domestic economy as it has attracted about $60 billion into the market, enhanced transparency and made forex available to the end-users.
The operations of companies, especially manufacturing, has been on the upward swing with an improvement in inflation figures as well as equities market performance.
Before the stability in the forex market and naira, the economy witnessed a depressed Gross Domestic Product (GDP) growth, which culminated in a recession in 2016.
“There was also rising inflation, which peaked at almost 19 per cent in January 2017 and a persistently rising unemployment rate to 14.23 per cent in 2016 fourth quarter from 6.41 per cent as at 2014 fourth quarter.
There was also a significant depreciation of the exchange rate, reaching N525 to $1 in February 2017 and witnessed a fast depletion of the reserves, which was drained down from about $23.6 billion in October 2016 from as high as $40 billion in January 2014.
A Lagos-based economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, described the introduction of the I&E forex window as the best policy by the CBN.
CBN’s Director, Corporate Communications, Isaac Okorafor, reiterated the bank’s commitment to ensure adequate forex supply to genuine customers to achieve the goal of forex rates convergence.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investors’ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.
Before the introduction of the window, foreign investors’appetite for local assets waned significantly on the back of currency crisis which in turn fundamentally weakened macroeconomic performance, dragged corporate earnings and also impacted on equities market viability.
According to the CBN spokesman, forex supply to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to naira. The apex bank is a market participant at the window to promote liquidity and professional market conduct.
He said the apex bank assured that the exchange rates of the transactions would be as agreed between authorised dealers and their counterparties.
Besides, he said the regulator reserved the right to intervene as a buyer or seller, as it deems fit, in the window, even as information on transactions between authorised dealers is reported to the CBN on a daily basis. Manufacturers and other forex end-users also seem to be having a great time over the coming of the window.
Barely a month after trading at the window started, international credit rating agency, Fitch Ratings, released a report, stating that the establishment of the I&E Forex window had led to an improvement in banks’forex liquidity situation.
Currency control measures
The CBN has imposed some currency control measures to save the naira. In June 2016, it curbed access to the interbank currency market for importers bringing various goods.
To conserve its dollar reserves, the bank said importers could no longer get hard currency to buy 41 items, ranging from toothpicks and rice to steel products and private jets.
Other measures it took include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched with FMDQ OTC Securities Exchange and the planned resumption of dollar sales to the BDCs.
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