Following the increase in investor confidence brought on by recent steps taken by the Central Bank of Nigeria, CBN, to eliminate multiple exchange rates and improve transparency in the foreign exchange market, Nigeria’s economy is poised to overcome the twin challenges of weak growth and declining trend in foreign exchange inflow.Before the measures, the economy was in trouble.
Declining foreign investment
According to the data from National Bureau of Statistics, capital Importation, which represents foreign investments, fell year-on-year YoY, by 28 per cent to $1.13 billion in Q1’23 from $1.57 billion in the corresponding period of 2021, Q1’22. During the same period, Foreign Direct Investment, FDI, fell YoY by 69.28 per cent to $47.6 million in Q1’23 from $154.97 million in Q1’22. In the same vein, Foreign Portfolio Investment, FPI fell by 32.2 per cent to $649.28 million in Q123 from $ 957.58 million in Q1’22.
Similarly, the NGX in a report last month showed that foreign portfolio investors reduced investments in Nigeria’s stock market to N53.71 billion in Q1’23, representing a 58.3 per cent decline on a year-on-year basis when compared to the N128.91bn they invested in the corresponding period in 2022. The NGX report on Domestic and Foreign Portfolio Participation in equities also showed a consistent decline in the value of FPI participation in the market from January to March this year.
Analysis showed that total foreign portfolio investment fell Month-on-Month, MoM by 26.9 per cent to N19.62bn in February, 2023 from N24.90bn in January, before falling again to N9.19bn at the end of March, indicating a 53.2 percent month-on-month decrease.
The above trend, in addition to low revenue from crude oil exports, accounted for the downward trend in the nation’s external reserves, to $31.119 billion at the end of June 2023 from $37.082 billion at the end of 2022.
This trend is however expected to be reversed in the second half of this year, H2’23, following the new operational measures announced by the CBN on June 14 in the foreign exchange market.
Forex reforms
Announcing the new measures in a statement titled, “Operational Changes to the Foreign Exchange Market”, Director, Financial Markets, Dr. Angela Sere-Ejembi, said, “The Central Bank of Nigeria (CBN) wishes to inform all authorized dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange (FX) Market:
“Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters (I&E) window. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.
“Re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window. Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window.
“The operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two (2) decimal places.
“Proscription of trading limits on oversold FX positions with permission to hedge short positions with Over-The Counter-futures. Limits on overbought positions shall be zero.
“Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP).
“Reintroduction of Order Book to ensure transparency of orders and seamless execution of trades.
“The operational hours of trades shall be from 9am to 4pm, Nigeria time.
“Cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.
Investors’ Confidence
In addition to breathing new life into the Investors and Exporters, I&E window, the above measures have enhanced investors’ confidence in Nigeria’s economy. This is reflected in the positive response from private sector and global financial institutions including the International Monetary Fund, IMF and the World Bank.
Commenting on the forex reforms measures, the International Monetary Fund’s (IMF) Representative in Nigeria, Mr Ari Aisen, noted that the development had been one of the Fund’s longstanding recommendations to Nigeria and that it was ready to provide technical assistance to enable the policy to succeed.
Ari stated: “The Fund greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations.
We stand ready to support the new administration in its implementation of FX reforms.”
Also, the World Bank, at the launch of the June 2023 edition of its Nigeria Development Update (NDU), on June 27, said changes to Nigeria’s foreign exchange market and the removal of an expensive subsidy on fuel, could save the country up to N3.9 trillion this year alone.
According to the report, “the removal of the subsidy, coupled with the FX reforms, are expected to provide fiscal savings of around N3.9 trillion in 2023 or 1.6 percent of GDP. Between 2023 and 2025, the savings would be over N21 trillion, compared with a scenario in which the fuel subsidy had continued, and the previous exchange rate regime had continued.
“The revenue-to-GDP ratio will rebound, reaching 7.4 percent of GDP in 2023, or 1.4 percentage points of GDP higher than if the reforms had not been enacted. The fiscal deficit is still expected to remain large, at 5.1 percent of GDP in 2023, before falling to 4.0 percent in 2024 and falling further to 3.9 percent of GDP in 2025. As such, debt servicing is expected to be lower than in the continuation of the subsidy scenario.”
Fitch Rating
Similarly, commending the CBN, international credit rating firm, Fitch said the measures may ease some of the severe foreign currency liquidity pressure faced by the Nigerian banks.
The company in a statement said: “The most important aspect of the CBN’s announcement is a plan to normalise the FX interbank market, in our view. The intention is to clear the backlog of overdue foreign currency obligations owed by banks to international creditors. These are primarily trade finance obligations owed to correspondent banks. In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy. The CBN says that providing foreign currency to the manufacturing sector is still a priority, but with restrictions eased, larger banks with greater access to foreign currency will be free to lend to the smaller banks whose access to international funding is restricted” Fitch Ratings stated in its report.
Fitch commended the CBN’s intention to increase intervention in the FX interbank market to increase supply of foreign exchange and the reduction of the maximum waiting times for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180.
“The first of these forwards was announced yesterday for USD500m, with banks reported to have bought around USD371m in one-month and two-month forwards. This should help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy. The CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations.”
Fitch also noted, “The operating environment for Nigerian banks is still challenged by the oil price shock, slow GDP growth, pressure on the naira, scarce access to foreign currency and policy uncertainty.”
But the company stated that the CBN plan will also make it easier for individuals and business customers to meet their foreign currency travel and other personal needs because it will sell foreign currency to banks at a rate not exceeding 20 percent over the interbank (official) rate for these purposes.