CBN Implements Stricter Measures to Curb Forex Speculation

In a bid to address concerns over rising foreign currency exposures among banks, the Central Bank of Nigeria (CBN) has issued a new circular outlining prudential requirements.  The directive aims to mitigate risks associated with excessive foreign currency speculation. The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” stipulates that the Net Open Position (NOP) limit for overall foreign currency assets and liabilities should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses.  Banks with current NOP exceeding these limits must adjust to the prudential limit by February 1, 2024. Banks are now mandated to calculate their daily and monthly NOP and Foreign currency trading position using provided templates.  Non-compliance with the NOP limit may result in immediate sanctions and/or suspension from the foreign exchange market, warns the apex bank. Additionally, the CBN requires banks to maintain a sufficient stock of high-quality liquid foreign assets to cover maturing foreign currency obligations.   Foreign exchange contingency funding arrangements with other financial institutions are also mandatory. To mitigate currency risks, banks are urged to borrow and lend in the same currency, adopt natural hedging, and align interest rates for borrowing and lending.  The circular also emphasized the need for approval from the CBN for any early redemption clause in eurobonds.

Naira Plunges Across Forex Segments Amid Liquidity

The naira closed last week on a losing streak, plunging in all segments of the foreign exchange (forex) market. “In the local currency market, the performance of the naira was underwhelming”, said analysts at Afrinvest. At the parallel market, the base currency (Dollar) appreciated 1.8 per cent week-on-week (w/w) against the price currency (naira) to N1,150.00/$. While at the NAFEM window, the base currency (dollar) rose 0.4 per vent w/w against the naira) to N794.89/$. Meanwhile, activity level in the NAFEM window improved by 11.1 per cent w/w to $817.7 billion from $736.3 billion in the prior week. At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts of the Naira remained at $4.2 billion. “We do not foresee any changes given that CBN has cleared all Non-Deliverable Forwards (NDFs) open contracts, shortly after rendering contracts for tenors between one and twelve months inactive in response to reforms in the NAFEM window. This week, we expect rates across different segments of the market to depreciate following demand-supply imbalance”, said Afrinvest. At the end of trading last week, system liquidity surged higher by 667.2 per cent to close at N527.1 billion. Nonetheless, the price of liquidity in the banking system, the OPR and OVN rates rose 2.9ppts and 2.4ppts w/w respectively to 23.8 per cent and 24.6 per cent. At the primary market segment for T-bills, the CBN offered bills worth N211.7 billion across the 91 (N9.7 billion), 182 (N1.8 billion), and 364-day (N199.9 billion) tenors. Demand was healthy across all ends of the curve as the average bid-to-cover ratio printed at 5.8x due to robust system liquidity. Stop rates across the 91-day and 182- day instrument improved, rising 100bps apiece to 7.0 per cent (91-day) and 11.0 per cent (182-day). Meanwhile, the stop rate remained unchanged at 16.8 per cent in the 364-day instrument. Meanwhile, the secondary market segment saw a bullish outing as the average yield across all tenors compressed 213 basis points (bps) w/w to 11.2 per cent. The bullish outing was driven by buy interest on the mid (182-day) and long-dated (365-day) instruments as yield saw a decline of 242bps and 221bps w/w respectively. In the coming week, we anticipate healthy liquidity conditions due to FAAC inflow and Bond coupon payment. Consequently, we expect buy sentiment to be sustained at the T-bills secondary market. Meanwhile, Brent crude oil price futures inched higher by 1.4 per cent to close at $81.75/bbl., as traders remained on the sideline ahead of next week’s Organisation of Petroleum Exporting Countries (OPEC+) meeting. The anticipated meeting would focus on output cut agreements for 2024, following the recent downturn in oil price due to strong supply from non-OPEC producers. Meanwhile, on the domestic front, Nigeria’s foreign reserves fell 28bps ($91.7m) w/w to $33.2bn (22/11/2023).

IMF supports Nigeria’s exchange rate unification

The exchange rate unification policy of the President Bola Ahmed Tinubu has received the backing of global lender, the International Monetary Fund (IMF).  Over the last several years, Nigeria has been operating a dual exchange rate regime which had led to round tripping with many Nigerian businesses preferring to trade dollars than engage in their legitimate businesses. According to the Apex Bank had in a statement abolished the dual exchange rate collapsing it into the Investors Exporters (I&E) window.  The regulator stated that it is expected to be a willing seller and a willing buyers  With the policy, all applications for medicals, school fees, business travel allowance/personal travel allowance, and SMEs would now go through the I&E window. in a short statement, on Friday, IMF’s Resident Representative in Nigeria, Ari Aisen said it would support the federal government as it implement the new reform.  “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.” The Bretton Woods institute and experts consistently warned the federal government on the dangers of keeping a dual exchange rate saying it created room for arbitrage.