On 21st April, 2017, the Central Bank of Nigeria (CBN) announced the opening of the Nigerian Autonomous Foreign Exchange Fixing Mechanism; commonly known as the New Investors Foreign Exchange (FX) Window. The apex bank described the Window as being “a means of boosting liquidity in the foreign exchange market and ensuring timely execution and settlement of eligible transactions”. This Window came on the heels of the introduction of the special FX Window for Small and Medium Enterprises for the importation of finished and semi-finished items. It was reported that by May 2017, as a result of the new investors FX window, market capitalisation rose to
N9.069 trillion from N8.802 trillion as at the end of March 2017.
This report provides an overview of the established Investors Window, its impact on the Nigerian economy and the constraints that remain within the Nigerian money market.
THE NEW INVESTORS WINDOW
According to the CBN Circular dated 21st April, 2017, the Window allows access to all invisible transactions, bills for collection and other trade-related payment obligations at the instance of the customer which by implication grants access to a wide range of the participants and suppliers within the money market, including, portfolio investors, exporters, authorised dealers and other parties with foreign currency for exchange to Naira. The apex bank is also listed as an eligible participant with specified purpose of stimulating liquidity and promoting professional conduct.
The key highlights are as follows:
- The Market has been established to work as a single market through the interbank/autonomous window.
- The Market is purely driven by market forces. CBN refrained from prescribing a set band or rates thereby leaving the rates to supply and demand within the market. Supply and Demand are thereby determined by the agreements between the authorised dealers and their counterparties.
- The CBN reserves the right to intervene as either a buyer or seller as it deems fit.
- Price Discovery: according to the circular, the on-boarding of the Thomas Reuters FX Trading and Auction System has been slow and therefore, participants are allowed to trade via recorded and auditable telephone conversations for ease of pooling.
- In lieu of the FX Trading System, the FMDQ has been charged with the responsibility of price determination. In doing so, the FMDQ must pool data from authorised dealers daily which would then be determined in averages and posted on the website twice daily i.e. Opening Rates at 9:00am daily and Closing Rates at 4:00pm.
- Banks are not required to return the unsold balance of the CBN FX Window. Instead, they are to reroute the surplus into the New Investors Window.
- Under the circular, domiciliary accounts are classified as invisibles. As such, income from outside the Country can be converted into Naira at the market rate.
- Authorised dealers hold their position subject to their respective Foreign Currency Trading Position Limits and are not permitted to exceed these limits. Any excess must be sold off during trading hours either to customers, the CBN or another authorised dealer, subject to approval by the apex bank.
- All previous documentation requirements for permitted transactions still apply.
A STEP IN THR RIGHT DIRECTION
Over the last two years, the fall in global oil prices have brought about a sharp decline in Federal reserves of foreign currency, most especially, the Dollar. In response, the Government and the CBN sought to manage the crisis by focusing on demand and imposed strict regulations on the outflow of foreign currency. By introducing policies which included the banning of the imports of certain commodities and domiciliary accounts, the dismantling of Bureau de Changes (BDCs) among other restrictions, the economy began its downward trajectory. National production contracted severely which cumulated in the first recorded recession in 27 years. Inflation increased significantly from 9 per cent to 19 per cent within a year and unemployment continued to increase. The value of the Naira plummeted against the Dollar to N520/$.
Gradually, the Government took actions to liberalise the money market which included the increase of PMS from N87 per litre to N145 per litre. The resulting ease of the pressure on the economy encouraged the Government to adopt more forthright measures. Then came the shift in focus from policies that effected the demand of foreign currency to policies that focused on supply. It began with the resumption of weekly injections of foreign exchange to the BDCs, followed by the establishment of Foreign Exchange windows for invisibles, Personal Travel Allowances (PTA) and Business Travel Allowances (BTA), medical expenses and, more recently, SMEs, Investors, Exporters and End Users.
Since its inception, the Investors Window has traded $3.8 Billion as at 10th July, 2017. According to a Reuters report, in the week beginning 3rd July, 2017, $407 million was traded from $358.8 million in the previous week showing a vast improvement in the inflow and volume of Dollar in the economy. A number of positive reactions have been recorded as a result of the newly introduced Investors FX Window which lends credence to the suggestion that the CBN has taken a step in the right direction. These include but are not limited to:
Increased Market Confidence
Within the first week of the establishment of the investors FX Window, the Naira traded down between N374 - N380/$ from a peak of N520/$. As of 13th July, 2017, the FMDQ opening rate was quoted at N365.35 indicative of the closing rate of the previous day. It is speculated that as both demand and supply sides enter into increased discussions and trade more frequently, there will be greater convergence between the parallel market and the FX Window (open market) prices.
Investors, companies, exporters and other end users are operating within a market where rates are dictated by their ability to buy and sell currency freely. The cost of the Naira and the Dollar is directly hinged on the demand and supply of same. These factors create a market where its participants can confidently operate due to its relative certainty.
Increased FX Liquidity for Banks
Nigerian Banks have experienced increased accessibility to FX which was boosted by the supply and inflow of Foreign Currency into the banking system i.e. injections by the Government. This has resulted in the ease of the pressures on banks occasioned by the restrictions placed by CBN prior to the establishment of the FX Windows. These restrictions forced a number of banks to extend their maturities on trade finance obligations.
Renewed Investor Participation in Equities
There has been a significant influx of foreign investors due to the aforementioned increase in market confidence. According to the Communique No 113 of the Monetary Policy Committee Meeting held on 22nd and 23rd of May, 2017, there has been a bullish trend in the equities segment of the capital market as the All-Share Index rose by 10.20 per cent from N25,516.34 Million by 31st March, 2017 to N28,113.38 Million on 19th May, 2017.
Overall Economic Improvements
The positive reactions above were supported by other factors outside the establishment of the new FX Window such as the successful issuance of the $1.5 Billion Eurobond in February 2017 and the passage of the 2017 budget which announced to the global economy that the Nigerian economy was in steady recovery. In addition, there has been an improvement in global oil prices above the $45/barrel benchmark coupled with a slight increase in domestic oil production above 2.0mbpd.
As with most policies within the money market, the success of the Investors FX Window is not without its constraints. Specifically, the Window has been criticised as being less “open market” as it purports to be, due to the retention of power by the CBN to intervene in the market as it deems fit. It can be speculated that the CBN may take advantage of said power and its position as the largest supplier of FX to influence the market rates.
In addition, there has been some agitation that the establishment of the new Window has occasioned a “crowding out” of SMEs. Currently, SMEs are allowed access to a special FX Window for the importation of finished and semi-finished items. Unfortunately, there remains a cap on the allowances per quarter to $20,000 which is approximately, N6 million at a rate of N360/$ with no bank charges. The New Investors’ FX Window Circular does not explicitly bar SMEs from participating.
The Circular also bars the Window from being used for airline ticket sale remittances thereby failing to address the foreign currency liquidity issues being experienced within the aviation industry. The foreign airlines within the Country continue to experience difficulties in repatriating their profits.
Monetary Policy Committee Communique
The Monetary Policy Committee conducted meetings on 22nd and 23rd May, 2017 where the growth prospects of the Country’s economy were discussed. Its meeting Communique, published on 23rd May, 2017 details both the positive outlooks and risk factors being faced within the capital market post-investors’ window. According to the Communique No. 113, relative to the end of December, 2016, the capital market indices rose by 4.60 per cent and 5.10 per cent respectively. This was interpreted as a reflection of the growing investor confidence following the improvement in foreign exchange policies. Furthermore, total foreign exchange inflows through the CBN was stated to have increased by 69.77 per cent in April, 2017 when compared to the previous month.
The MPC was of the opinion that upon assessment of key economic variables, including the Federal Government Recovery and Growth Plan, there were encouraging prospects of economic recovery in 2017. However, the MPC identified a number of “downside risks” that may negate the effectiveness of the recent money market policies. These included the possibility of global oil prices remaining low due to renewed investments in shale oil exploration and production, continuing monetary policy normalisation by the United States Federal Government which could lead to a strengthening of the US Dollar against the Naira and, consequently, a capital reversal within the Nigerian capital market and a loss of the recent gains.
The MPC pointed at the substantially high rate of inflation which continues to subsist irrespective of the downward trend which began in April, 2017 after the establishment of the new FX Window and expressed concern for associated risks to banking system liquidity from the uncertainty of the envisaged fiscal injections during the remainder of the year.
As a result, by a unanimous vote, the MPC decided to retain the Monetary Policy Rate (MPR) at 14 per cent, the Cash Reserve Ration (CRR) at 22.5 per cent, Liquidity Ratio at 30 per cent and the asymmetric corridor at +200 and -500 basis points around the MPR.
COMMERCIAL IMPLICATIONS FOR STAKEHOLDERS
The most recent FX Window does not accommodate the airline industry, however, there has been an announcement of the intention of the apex bank to open a special window for the airlines and oil marketers in order for them to settle their trade obligations. There have been no new developments with regard to these proposed actions. In the event that the CBN makes good on these promises to create a similar FX window to enable increased inflow of FX for the specific purpose of aviation-related transactions, there could be an easing of the liquidity pressures currently being faced by incumbent and entrant foreign airlines.
Indigenous carriers on the other hand are currently experiencing an opening up of the market as they are not specifically excluded from the new FX window. Strict application can be interpreted to mean that there is only an exclusion of remittances and repatriations of profits earned through sale of airline tickets. Where the company is wholly indigenous, repatriation lies outside the constraints to carrying on business. Consequently, a new FX window targeted at foreign airlines and their ability to repatriate and remit proceeds of ticket sales may cause a reduction of the market share of indigenous airlines as the industry becomes more conducive for foreign carriers.
The Parallel Market operates as an unofficial money market within a Country. Over the past 2 years, the country saw an increase in the demand for foreign currency at a time where there was a contraction in its supply. This led to the outright flourish of the Nigerian parallel market with exponential rates. With the inception of the new Investors’ Window, amongst other monetary policy measures, there has been a considerable shrinking of the gap between the parallel market rates and the FMDQ exchange rate. However, the parallel market remains present for those who prefer the customary paperless, quick and easy transactions and so far the market still remains to cater to the unique clientele; therefore, the effect of the recent Window may not be as severe.
As previously mentioned, there are varying implications for stakeholders, including banks, SMEs, investors and non-oil exporters. While banks may be experiencing an increase in FX liquidity, other restrictions imposed by the CBN remain and act counterproductively to the benefits being experienced. In the same vein, non-oil exporters have unfettered access to foreign currency and as such are experiencing greater ease of doing business. However, the high costs of production and doing business within the Country due to lack of electricity, high costs of fuel for alternative personal power generation, bans imposed on raw materials, makes it difficult for the businesses to operate efficiently.
Similarly, SMEs are being encouraged to focus on the utilisation of the special FX window opened two weeks prior to the new Investors’ Window. With the cap on the allotment for each quarter and the pegged rate at N360/$, SMEs unable to access the new Investor’s window may lose out on the benefits being experienced by other end users.
At a time when the Government and its stakeholders are working to create increased economic certainty for the sake of commercial viability within the Country and abroad, greater emphasis must be placed on taking advantage of and utilising the resources we have at our disposal. With each monetary policy implementation, comes the opportunity to increase production through investment, manufacturing and the revival of industries. Where there are roadblocks to development, business and corporate entities should explore options such as Private-Public Partnerships with the Government or foreign corporations for both infrastructural and non-infrastructural projects.
There has never been a greater time to broaden Nigeria’s export portfolio to further increase the inflow of foreign currency. An argument can also be made for a movement away from pricing commodities in Dollars within Africa, most especially among the West African States. As such, Nigeria can focus on strengthening the Naira against the currency of other African States.
Finally, the Government must focus on reviewing conflicting policies; for example, look into policies that ban importation of certain raw materials on the one hand and policies that open up access to funds to procure materials these businesses are banned from importing. There must be synergy with other aspects of the economic policy making.
The Central Bank of Nigeria, as the apex bank, has shown a vast improvement in its policy making with its recent flexibility. However, it still remains that the Bank has the power to intervene at will where it deems it fit to do so. It is hoped that in order to maintain the level of market and investor confidence, the CBN will refrain from interfering and may even go a step further to allow the same market forces to penetrate the other FX windows. Additionally, if the CBN must obtain maximum efficiency, its policies cannot work in a vacuum; other factors must merge with Government policies to produce the desired results.