A lot has happened over the past 2 weeks the Nigerian FX market.

First, the CBN released revised guidelines for the operation of the Nigerian inter-bank FX market with the objectives of enhancing efficiency and facilitating a liquid and transparent FX market. The CBN subsequently carried out the following related activities:

On 20th June, 2016 it met 100% of demand in the FX market total sales of $532 million on the spot market and $3.487 billion in the forwards market (in 3 month, 6 month and 9 month contracts), clearing the backlog of about $4.02 billion previously built-up demand for forex
On 27th June it launched the Naira-settled OTC FX futures market (in conjunction with FMDQ-OTC) and immediately engaged in several monthly futures contracts

As the dust begins to settle on following the initial activities, positive news has begun to filter in about the willingness of foreign portfolio investors who had ditched Nigeria following the collapse in oil prices to return. Indeed Citibank Nigeria immediately executed a $20 million FX Futures trade for undisclosed FPIs at the CBN ten-month (April 26, 2017) quote of ₦210/$.

It is important at this juncture to pause and assess CBN’s decision making and its impact on the market.

Chipping away at the policy

Official interbank F-rates seem to be settling around ₦282.00 – ₦283.00, albeit with the intervention of CBN. However, the spread between this official rate and the rates in the unofficial parallel market does not appear to be closing fast enough. In fact the rates have been diverging over the past few days as shown in the table below:

Date Buy (₦) Sell (₦)
24th June 345.00 352.00
28th June 342.00 347.00
30th June 335.00 345.00

The critical thing that investors are watching for is this – is the naira now rightly priced?

It appears that the answer is no, as investors still believe it is priced at least 15% above what the market should be. This is especially evident in the fact that while dollar to pound sterling rates have moved since last week’s Brexit vote, the Nigerian FX rates have remained remarkably unmoving. Expectations after a float are that rates move around wildly for a period before going to equilibrium. This, however, has not been the case in the Nigerian FX market following the policy. When this is juxtaposed with the manner in which the rates converged closer to the official rates used to calculate the importation of petrol on the PPPRA pricing template, as well as the fact that the CBN has made announcements of commencing direct sales of FX to BDC operators, it becomes worrisome that the primary purpose of a float of the currency is not being achieved.

The chief reason currency is floated is for pricing to be market determined in order to give confidence to FX sources such as investors and FX repatriation from Nigerians abroad to return to the country, enhancing liquidity in the hope that the increased supply will drive the rates down in the long run after initial spikes caused by the policy. However, actions as stated above are injurious to achieving this needed confidence. We urge the CBN to review these actions in order to enable this policy succeed.

Perhaps the decision to keep some items off the approved import list is fuelling the demand for black market dollars. One thing is clear – until the rates close, the door remains open for those seeking arbitrage opportunities in the FX market and CBN’s aim of an efficient and transparent FX market will never truly be realised.

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