• Illiquidity in parallel market hits all-time high
• Bank branches restricted to two payments a month as funding dries up
• Foreign investors, others in wait-and-see mode
• Nigeria risks currency ‘liquefaction’, Owoh warns
• ‘Time to visit human component of monetary policy reform’
Illiquidity, at both official and unofficial segments of the market, has reached an all-time high with dealers stuck in a one-way track.
With banks and black-market dealers left to source for FX to remain in business, supply seems to have dried up completely, putting end-users in a dire strait.
The Guardian learnt at the weekend that crucial overseas business and personal trips are being postponed as the illiquidity crisis worsens while many companies relying on imported inputs are in a dilemma.
Users are trapped between the illiquid black market and cumbersome official markets as market arbitrage, which had hit 100 per cent sometime last, becomes a no issue with converged rates.
Multiple sources disclosed, yesterday, that many commercial banks, who lack funding sources, have suspended processing FX requests.
Three days into the new month, an official at the FX desk of a leading bank said “we are fully booked” for the month. Hence, she was attending to new applications.
“We can only fund two transactions in a month, and we have started processing the ones we can take for already. This applies to all our branches,” the banker said.
Asked why she restricted applications to two, she noted that the branch allocation could only cover two individuals. At the time, three more persons were also making inquiries about personal travel allowance (PTA) funding. But they all left disappointed.
But illiquidity is the only one of the two major reasons that stall the processing of fresh applications by many banks. Deposit money banks (DMBs) are required to use the weighted average rate of the last trading at the FMDQ platform as the prevailing rate to sell FX to end-users.
Sources at multiple banks explained that the current validity of the market and the fact that the rates change daily make the process extremely cumbersome.
“If you start a process and a recommendation is done, the rate may have changed before approval comes. That invalidates the entire process. Sometimes, you are not sure what the market rate would be between approval and disbursement. This makes the process extremely rigid,” a banker narrated.
The Guardian learnt yesterday that some banks have advised their staffers to stop processing documentation by personal travel/business travel allowance (PT/BTA) and other invisible FX users outrightly until they have a clear understanding of how the new process works.
But The Guardian could not independently confirm the claims from the corporate communications handlers of the banks. Some of the communications officials said they would need time to get an update on subsisting rules.
The CBN spokespersons would not comment on the issues. But an insider source said the bank is staying off completely “from both funding and regulation of the application process”.
“It is a willing-buyer, willing-seller market. The CBN has nothing to do with the banks’ engagement with customers and funding. The CBN also sets the regulatory template but the operational process, funding and disbursement are at the discretion of the commercial banks based on availability,” the source told The Guardian.
Asked whether the bank could consider providing liquidity, the source said the option was not in consideration as the market is fully liberalised.
Supply is expected to improve in the coming months as reforms have improved the market outlook considerably. But the investment market, including foreign investors, is currently in wait-and-see mode, findings have suggested. The fiscal character of President Tinubu, who is expected to submit a list of ministerial nominees to the Senate this week, is a crucial subject to the mix of factors that could unlock capital inflow.
Economists and other stakeholders are demanding that merit trumps political considerations in deciding who gets what in the next cabinet and that efforts must be made to stem fiscal rascality.
Monetary failure and fiscal indiscipline are distinct issues. But each touch upon deep-seated issues of poor governance and historical economic woes the country has contended with in the past decades.
Different sources, especially in the investment market, told The Guardian that leads are positives and pipelines extremely busy. But there is a lag between when reforms kick off and when companies and individuals begin to make the final investment decisions (FIDs) that eventually unlock the needed fund – dollars in the case of Nigeria.
These gaps between prospect and reality are some of the odds that have made it difficult for naira to respond positively to reforms embarked on by the new president, some experts have suggested.
Last week, the Bank of America (BoA) suggested that the naira has regressed to an undervalued position. It puts the fair value of the local currency at N680 per dollar. The bank, in a reported note to clients, noted that “An addition of $12-13 billion on export revenues from higher oil production is moderated by a liberalised imports regime that could add $10 billion as non-oil imports increase. Still a net gain of $2-3 billion that strengthens the current account surplus.”
Like other experts, BoA said the near-term pressure could continue for the rest of the year as the economy battles with backlog FX demands.
An investment expert and former Vice President at Parthian Group, Ola Oladele, in a chat, said “pent-up demand and a backlog of unfulfilled demand will take some time to unwind”. Until then, she said, the current pressure would continue.
“Seeing that banks are expected to buy from the market to deliver to their customers, I expect that it will take some time for things to calm down.
“There is a need for increased and sustained supply. We expect that opening up the markets should increase confidence in the near to mid-term. This should encourage investors to come in and also encourage repatriation of funds by Nigerians in the diaspora,” she added.
Like other Nigerians, Oladele is also starved of FX but patiently waiting for “banks to open up the use of Naira cards for foreign transactions, even if it is within limits”. She believed that would reduce demand for PTA, especially with the summer holidays around the corner.
With summer ahead, it will be a bumpy ride for naira in the coming months, experts have warned.
The concerns are complicated by extreme market volatility, especially as the official window continues to trade at an extremely-high volatility position, raising concern about the possibility of a major glitch. The wide swing has become a norm at the Investors’ and Exporters’ (I&E) window, raising concern about the possibility of market manipulation.
On Friday, the dollar traded between N461.5 and N841, a rare occurrence even in parallel currency markets globally. The market opened at N758.56 to a dollar before switching to an extremely volatile intra-session movement, which has become a norm. It eventually closed at N769.25/$.
Yesterday, the market gained reasonably close at N741.5 to a dollar. But the wild-swing trading continued.
In his half-year (H1) economic review, Yusuf, who has commended the FX rates harmonisation for its prospect of restoring stability in the market, urged the apex bank to “put in place a sustainable intervention framework to moderate the volatility in the forex market.”
A professor of applied economics who had been involved in an extensive consulting engagement with the CBN, Godwin Owoh, only hoped the market would achieve stability in the coming days. Otherwise, extreme volatility and other deep-seated challenges are signs that the market has transcended from crisis level to what he described as “currency liquefaction”, a state where the foundational blocks of the valuation appropriation are completely eroded.
Owoh added that rate harmonisation is a necessary but not sufficient step to achieving market stability. He said it “is time to remove the veil on the apex bank” and address the human factor side of the reform. That, according to him, would require a comprehensive investigation of every official that was part of the leadership team that dictated the policy direction of the regulator in recent years.
“The first phase of reaction is what the current government has done. The next major action is to go deep into what caused the initial problem and solidify the ground so that the structure can stand on it. It is not enough to reinforce the collapsing building, which the government has done, but to reinforce the soil so that it can withstand the weight placed on it,” he said.
This, the scholar said, would require a thorough cleaning of the monetary authority and dealing with the malfeasance that has remained for years. As part of the clean-up, which the President first referred to as “housecleaning”, Owoh said FMDQ and related operational structure must be disbanded. Until major recoveries are made and individuals sanctioned, he said, monetary reform could not be said to have started in earnest.
The exchange rates convergence, which was strangely prescribed by President Bola Tinubu (interpreted by some as a usurpation of the autonomy of the monetary authority as enshrined in the CBN), took effect on June 14.
Since then, the spread between the official and black-market rates has shrunk to zero. Yesterday, the Investors’ and Exporters’ (I&E) window closed at N763/$ – about the same amount the black market currently trades.
The FX rates convergence should have made choice easier for end-users. But the parallel market dealers have run out of liquidity. A dealer explains that quotes have been mostly one-way (buying) “since there is nothing to sell.
“Supply trickles and you need to wait for two or three days to get a little. That is why dealers don’t bother giving selling rates. You can only give a price when you have to sell.” (Guardian)
