The illiquidity in the foreign exchange market occasioned by the Central Bank of Nigeria (CBN’s) currency trading restrictions is giving correspondent banks sleepless nights and making it increasingly difficult for banks’ customers to meet their forex obligations through the official market, New Telegraph has learnt. A bank’s chief executive, who confirmed these developments, said at the weekend that the forex controls were also affecting the lenders. He added that the dearth of forex in the market has worsened since last February when the Central Bank scrapped the official bi-weekly forex market (Dutch Auction System – DAS) and adopted random interventions, which seldom meet all banks’ legitimate demands. In addition to this, he explained, is the reduction in forex inflow from the oil firms, which usually sell their dollar earn-ings to meet their naira obligations.
“It’s a real difficult situation because customers and banks are defaulting on their dollar obligations and the CBN is not helping matters as they have refused to sell forex because the reserves are going down,” the source said. As at last Thursday, the nation’s foreign reserves, with which the CBN uses to defend the naira, had been drawn down to $29 billion, which could barely meet five month’s imports.
A treasurer in one of the big banks that attended last Friday’s meeting with the CBN Governor, Mr. Godwin Emefiele in Lagos, however, said the forces of demand and supply in the forex market showed a need to further devalue the naira. He said: “From all indications, the current exchange rate does not make sense given the reality in the market. So, the market points to devaluation and the possibility of devaluation is 95.5 per cent, but the CBN governor is not disposed to this.” Explaining what transpired last Friday between the CBN governor with banks’ chief executives and treasurers in Abuja, he said the gathering, which lasted for about three hours, was in three batches.
The first was with CEOs of five banks, including a female CEO from one of the foreign lenders that elected to attend the meeting; the second was with five senior treasurers, while the third meeting, which lasted just 10 minutes, was with other treasurers. The treasurers were said to have made a presentation on how to improve liquidity in the forex market to Emefiele, who promised to get back to them. Among some of the recommendations made by the treasurers include the removal of restrictions on trading, as well as the increase in banks’ Open Position Limits (OPL). “We complained about the recent introduction of the Order-Based Two-Way Quote (OB2WQ) for forex, which demands that quotation for foreign exchange should be backed by evidence of need as against the previous Open-Ended policy, which had no restrictions,” one of the treasurers confided in New Telegraph.
New Telegraph had, two weeks ago, reported that the CBN governor might have taken personal charge of scrutinising banks’ foreign exchange demand as part of efforts to check speculation and arbitrage. Investigations revealed that although the apex bank’s Trade and Exchange Department is responsible for overseeing the lenders’ official foreign exchange demand and other authorised forex dealers. In recent times, the department has to wait for the CBN governor to approve banks’ requests before the lenders receive the forex.
This development had resulted in banks endur-ing costly delays in getting forex at the official rate from the regulator. One of the lenders had said his bank applied for foreign exchange to pay for the services of this consultant since January, but the request was not approved until May because of delay in approval from the CBN governor. But a top CBN official, who asked that his identity should not be revealed because he was not authorised to speak on the matter, said the allegation “cannot be true and can’t be generic.”
He said lenders were being economical with the truth and were always looking for loose ends. “Please kindly ask the banks, were their documentations complete? We have had three Bankers’ Committee meetings since the beginning of this year, why didn’t they table the matter at the meeting? If you can give me the names of these banks, then we would be able to investigate,” he said. The dearth of liquidity in the forex market, caused by the apex bank’s forex trading restrictions last December, had compelled JP Morgan to threaten to kick Nigeria out of its emerging market bond indexes tracked by more than $200 billion of funds. JP Morgan, which is the largest bank in the United States, with total assets of $2.6 trillion, said the decision to remove Nigeria would be finalised by December.
Within this period, JP Morgan Chase & Co. said it expected the new government, headed by PresidentMuhammadu Buhari, to have eased trading conditions. Nigeria, according to the American multinational banking and financial services holding company, has a 1.8 percent weighting in the gauge. JP Morgan had placed Nigeria on “index watch negative” on January 16. But the CBN governor had assured jittery investors that the Central Bank was “doing everything possible” to ensure that the country remained on the JP Morgan Index in order to avoid the adverse consequences, which the country’s exclusion could cause. About $4 billion of Nigerian local-currency bonds could be impacted by JP Morgan’s decision, according to analysts. Emefiele, confronted with lower crude prices and a naira that has weakened 18 per cent against the dollar in the past 13 months, enforced trading restrictions to stabilise the currency. He has said the measures were designed to curb speculative demand for dollars.
Between June and last week, oil prices had fallen by over 40 per cent from $115 to below $68 per barrel. With oil accounting for over 90 per cent of the nation’s export earnings and over 70 per cent of government’s revenue, the developments have put enormous pressure on the CBN’s capacity to defend the naira as the external reserves plummeted. As part of efforts to stabilise the exchange rate, the CBN introduced several measures, including devaluing the naira twice, first in November 2014 and last February.
The CBN recently adjusted its exchange rate peg to N196.90 to a dollar at the interbank market, the same rate it closed last Friday. The naira has been stable at the interbank market. The Central Bank had, previously, made a tiny adjustment to the exchange rate peg, with analysts saying the move indicated that the CBN was beginning to think about how to loosen its currency regime.
A dealer said the Central Bank was trying to gauge the level at which it could defend the naira, but noted that the bank was running low on ammunition to do this. With the fall in price of crude oil at the international markets and Nigeria’s burgeoning import bill, Emefiele has limited options at his disposal in keeping the nation’s currency afloat.
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