Nigeria’s rusty FX market struggles to crank back to life

The Central Bank of Nigeria (CBN)’s latest attempt to shore up the ailing naira by offloading a record amount of dollars directly to businesses has not delivered the impact many, including the apex bank itself, expected it would.

Since the CBN’s sale of some $815 million directly to businesses from manufacturers to airlines on August 6, the biggest single day intervention under new governor Olayemi Cardoso, the naira has barely budged.

A dollar sold for N1601 the day before the CBN offloaded the record amount to the market but still sold for as high as N1592 on Tuesday August 20, according to data obtained from FMDQ Securities Exchange, which calculates the rates.

That translates to a mere 0.5 percent gain for the naira since the CBN’s retail dollar auction.

“The market was expecting a bigger appreciation of the naira but that has not happened,” a trader who did not want to be named said.

“The CBN had hoped the sale would deliver big gains for the naira and send a signal of its increasing ability to intervene in the market when it needed to stabilise the rates,” the trader said.

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The CBN did expect the sale to ease pressure on the naira.

In a circular announcing the retail dollar auction to lenders, the Abuja-based bank said the sale followed “growing unmet foreign exchange demand” which has “continued to increase the demand pressure in the foreign exchange market, with adverse impact on the exchange rate of the naira.”

“Clearly, there’s still some way to go in fully restoring investor confidence in the market,” the trader said.

The CBN’s dollar sale was also supposed to send a signal of improving dollar liquidity. Some investors have balked at a return to Nigeria due to a perceived dollar shortage and volatile exchange rate.

“Investors have also grown cold feet in recent weeks over Nigeria and that stems from a lack of trust about the true state of things with the reserves as well as the lack of sufficient clarity about the government’s financial health especially with the petrol subsidy return,” a London-based fund manager said.

One indication of slowing foreign portfolio inflows into Nigeria is data by the NGX that shows new foreign investments in the stock market fell to a six-month low of N37.57 billion in July.

Bond traders also said foreign participation in bond auctions have cooled in recent months.

With foreigners showing less interest in investing in Nigeria, the CBN’s interventions in the FX market have now taken more significance.

Those interventions have however been few and far between.

Some business owners said that a consistent pattern to the CBN’s interventions would help businesses plan better and ease some demand pressure.

Currency traders also finger the lack of consistency in the CBN’s dollar sales as the reason for the unrelenting pressure on the naira.

Bureau De Change (BDC) operators said that a lack of frequency of the CBN’s dollar sales gives rise to loss of confidence in the forex market by the customers thereby putting pressure on the parallel market.

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“So you know the thing is continuity, once people know that it is not what is coming frequently, before you know it people will now lose confidence again because our customers cannot wait without any information as to when they will get forex after which they will get their ticket and then travel. So that really will push the pressure back to the parallel market, so that’s the problem,” Aminu Gwadebe, president of the association of Bureau de Change operators said.

The long walk to stability

The naira has declined sharply against the dollar since reforms last year by the CBN that sought to find a market-determined rate for the currency.

The naira has plunged by over 100 percent since the FX reforms, moving from N460/$ to N1,580/$, despite the CBN’s liquidity tightening measures and efforts to restore investor confidence in a market that had been damaged for eight years.

The naira crash has fanned inflation, which despite slowing for the first time in 18 months in July to 33.40 percent, remains well above the CBN’s target.

“Nigeria is still reeling from eight years of a dysfunctional FX market even though some of the problems go even well beyond the last eight years,” was the way one former bank managing director put it in an interview with BusinessDay.

An artificial and unrealistic rate drained liquidity from the official market during former CBN governor Godwin Emefiele’s tenure. The acute dollar scarcity sent businesses to the black market for dollars. Foreign investors steered clear of Nigeria with tales of investors whose funds were trapped in the currency spooking new investors.

The bank however abandoned its unorthodox monetary policies following the replacement of the embattled Emefiele with Olayemi Cardoso late last year.

Cardoso has returned to orthodox monetary policy in that time and has embraced market reforms necessary to restore investor confidence.

The CBN and Cardoso are however finding that it will take more than a year to undo some of the damage done to the FX market in the last eight years.

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“Forex trading in Nigeria is rusty, it’s like trying to get a car that has been parked in the garage for eight years running at the first start,” a source familiar with the matter said.

“Several bank treasurers with under 10 years experience have not been trading, they don’t understand market-making,

“There are not enough experienced traders in the market,” the source said.