CBN rules on FX trading will afffect Nigeria’s economy

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Nigeria’s economy may grind to a halt in coming weeks unless the Central Bank (CBN) moves to relax rules that have curbed Foreign Currency (FX) trading and liquidity in Africa’s largest economy.

Banks have been unable to open letters of credit for their clients, resulting in an increasing backlog of unmet dollar demand by Nigerian firms, even as supply of dollars into the interbank market falls.

“Manufacturers are unable to fund FX for raw materials and banks are scrambling for dollars overseas as credit lines dry up. Things are at a standstill,” Stephen Onasanya, Group Managing Director and CEO of First Bank Plc, Nigeria’s largest lender by assets, said at a Bloomberg conference at the Nigerian Stock Exchange (NSE) yesterday in Lagos.

“The CBN cannot support the naira at these levels,” Onasanya said.

Nigeria’s Central Bank recently banned importers from using the interbank foreign-exchange market for some goods and enforced trading restrictions to stabilise the naira that weakened 14 percent against the dollar in 2014.

The measures have led to a near collapse in trading in the interbank FX market and a CBN that is increasingly being seen by investors as driven by fear” of further devaluation, as opposed to a rational exchange rate policy.

“There were 14 pronouncements by the CBN on FX alone between November 2014 and February 2015. The CBN seems to be working in a silo without any clear FX policy,” Kyari Bukar, MD/CEO of the Central Securities Clearing System (CSCS) said.

The CBN is struggling with meeting demand for dollars due to the 40 percent fall in crude oil prices to below $65 a barrel in the past year and because Nigeria gets up to 90 percent of dollar earnings from crude oil sales.

The Central Bank’s Gross dollar reserves fell to $29 billion on June 24, down 15 percent from the $34.49 billion it was at the beginning of 2015.

The backlog of unmet dollar demand is “substantial” according to Peter Amangbo, Group Managing Director and CEO of Zenith Bank.

“There is a need to clear that backlog and start at a zero base. We now have a case of panic in the market,” Amangbo said at the same conference.

“A decicion has to be made soon, and we believe that the size of the FX backlog can be managed, with the easing of the interbank trading restrictions coming afterwards.”

The Central Bank is however resisting a further devaluation of the national currency.

CBN Governor, Godwin Emefiele, at a meeting with treasurers and members of the Financial Markets Dealers Associationlast week, outlined concerns that that removing naira trading curbs may cause dollar demand to surge and the naira to enter a freefall, sources present at the meeting told BusinessDay.

The CBN instead renewed foreign exchange controls this week by stopping Nigerians from using the interbank FX market to access dollars for 40 categories of goods, ranging from private jets to rice, Eurobonds and foreign shares.

The dollar shortage and lack of clarity on fuel subsidy payments may lead to a return of fuel shortages soon, said Austin Avuru, CEO of upstream Nigerian oil firm Seplat.

“In three weeks the scarcity of petroleum products will resume, as very little importation is being done at the moment,” said Avuru.

“The current respite is being caused by some people who owe the government, that are bringing in shiploads of products.”

JPMorgan Chase & Co. said it may cut Nigeria from its emerging market bond indexes, tracked by more than $200 billion of funds, because of the currency restrictions, which it said may make it more difficult for investors to track the gauges.

The New York-based lender will make a decision by the end of the year, it said on June 5.

“There is very little the CBN Governor can do in isolation and must partner with other arms of government to avoid a run-away value of the naira,” said Femi Olaloku, Executive Director, Treasury at UBA said.

“The current measures are not working.”

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