The fear of how much a naira exchanges for dollar dominated the business environment in the first half of this year. With the local currency closing the first half of the year at N503 to dollar at the parallel market, more than 90 per cent of manufacturers who source their foreign exchange from the market had tales of woes to tell. COLLINS NWEZE writes that naira devaluations within the period dealt heavy blow to consumers’ purchasing power as inflation soared…
The naira had a turbulent time in both the official and parallel markets in the first half of the year. The unification of the official and the Nigeria Autonomous Foreign Exchange (NAFEX) rates in May, the limited interventions in the Investors & Exporters window and the restriction of access to foreign exchange (FX) for the 45 items on the CBN’s restricted list created a surge in demand for forex in the parallel exchange market.
This was estimated to cater for nearly 90 per cent of manufacturers’ FX needs. The existence of these rates (official, NAFEX and parallel) negatively affected investor confidence and created opportunities for speculation and arbitrage.
While the CBN’s official rate has been merged with the I&E Window rate and the NAFEX rate (all three are around N411/US$1), and this was lauded by the World Bank, it was clear that it would not be enough to solve FX challenges.
The unofficial cash parallel market rate stands at N503/$1 by the close of business on June 30. In the medium term the World Bank expects that the priority is to merge the exchange rates.
Still, policy implementations and decision of the Central Bank of Nigeria (CBN) to provide more dollar liquidity in the economy through improved funding for banks is expected to put forex speculators on edge.
One of such policies was ‘the Naira for Dollar’ programme. Not many people considered the possibility of being rewarded for receiving dollar inflow from the diaspora.
That was before the take off of the CBN’s ‘Naira dollar for Scheme’, which gives N5 rebate for every $1 sent by Nigerians in diaspora. For instance, a customer that receives $10,000, gets N50,000 as reward.
According to the World Bank report, over $21 billion is received yearly through diaspora remittances.
The CBN Governor, Godwin Emefiele, who announced the policy take-off on March 8, said the money would be paid to the account of the diaspora remittances’ beneficiaries, following receipt of the remittance inflows. The initiative has continued even after the May 8 timeline. It was meant to close after two-month implementation.
Emefiele explained that the move was also to increase the transparency of remittance inflows and reduce rent-seeking.
But the successes recorded so far in the scheme are attributed to the commitment by commercial banks to ensure its implementation by building patronage of their international money transfer offerings.
Several banks, including Ecobank Nigeria, Access Bank, United Bank for Africa, First Bank Nigeria, and Stanbic IBTC Bank, are committed to the scheme.
Many of the banks went into partnership with various international money transfer services, which include Western Union, MoneyGram, WorldRemit, RIA, Transfast and AWS Malta. The deals have helped the bank to attract more foreign capital to the economy and reaffirmed its leadership role in that business segment.
Emefiele said Nigeria, like other emerging market countries and countries reliant on oil exports, the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into the country.
“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” he said.
Emefiele explained that due to the unprecedented nature of the shock, the apex bank has continued to favour a gradual liberalisation of the foreign exchange market to make smooth exchange rate volatility and mitigate the impact, which rapid changes in the exchange rate could have on key macro-economic variables.
It was also disclosed within the period under review that commercial banks are writing their top customers demanding that prices for loans extended to them be reviewed upwards to reflect new interest rate realities.
The new and higher lending rates already being implemented by banks on the top borrowers followed rise in government borrowings through Nigeria Treasury Bills (NT-Bills).
Yields for one-year NT-Bills was 7.8 per cent at the weekend, higher than about 1.5 per cent paid a year ago.
The rise in borrowing rates by the government has pushed depositors to demand higher interest for their funds, leading to higher rates for loans. Term deposit rates in banks have also risen to around 9.5 per cent from below five pre cent a year ago during the low-yield government securities era.
With the development, many commercial banks that gave long-term loans to their top customers when they got cheaper deposits are now writing such customers demanding that the the loans be repriced as deposit rates rose.
Managing Director, BaoBab Microfinance Bank, Kazeem Olanrewaju said commercial banks that previously gave out cheap loans to their customers when NT-Bills rate was low are demanding that the loan prices be renegotiated to suit new market rates.
“Banking is like every other thing. You cannot be buying money costly and selling cheap. Our own bank (a commercial bank) has written to us, asking us to come and renegotiate price for the loans we took from them. Nobody is asking for interest rates on deposits, everybody is asking for something extra on loans already extended,” he disclosed.
Continuing, Olanrewaju said: “For more than one year, we have been with the commercial bank, and suddenly the bank is now changing the whole parameter asking that the loan price be renegotiated. For us, when we sign a contract with a customer, that contract stands till the end of the tenor of the loan”.
In emailed notes to investors, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said: “Yields in the Nigerian Treasury Bills (NT-Bills) market have sustained an upward trajectory over the past few weeks. This means that with as little as N100,000 you can have access to yields as high as 7.75 per cent for 316 days if you invest through Afrinvest Securities today.”
In the deposit insurance segment, the Nigeria Deposit Insurance Corporation (NDIC) has announced plans to commence payment of liquidation dividends to uninsured depositors, creditors and shareholders of 14 banks in-liquidation.
The banks -in-liquidation include City Express Bank, All States Trust Bank, Allied Bank, Commerce Bank, North South Bank, Cooperative and Commerce Bank and Nigeria Merchant Bank.
Others are Hilltop MFB, Olomoyoyo Microfinance Bank, Evo Microfinance Bank, Ngwegwe Microfinance Bank, Bekwarra Microfinance Bank, Argungu Microfinance Bank and Edet Microfinance Bank.
NDIC Director, Communication and Public Affairs Department, Bashir Nuhu, said stakeholders of eight closed banks were to receive their first round of liquidation dividend payments, those of the other six are to be paid additional sums due to them as part of their liquidation dividends.
The corporation advised eligible stakeholders of the banks to visit its offices nationwide for the verification of their claims or do so on its website.
In a related development, the corporation has commenced verification of depositors of 22 Microfinance banks whose operating licences were recently revoked by the CBN.
The exercise is geared towards payment of insured sums to eligible depositors.
The CBN-led Monetary Policy Committee (MPC) last meeting in May captured the interplay in the economy.
The committee members said although the economy had exited the recession, the recovery was fragile given that the Gross Domestic Product (GDP) of 0.51 per cent was still far below population growth rate. It, therefore, said there is a strong need for the monetary authorities to consolidate on administrative measures taken not only to rein in inflation, but also on the actions so far taken to grow output.
In the committee’s view, such measures should include boosting consumption and investments, as well as diversifying the base of the economy through forex restrictions to avoid the importation of local goods and food products.
It urged the bank to continue to put in place measures that will boost export earnings. On consumption and investment, MPC noted that the intervention facilities under the Anchor Borrowers was N631.4 billion granted to 3,107,949 small holder farmers cultivating 3.8 million of land hectares; for the AGSMEIS, N111.7 billion to 29,026 beneficiaries; and for the Targeted Credit Facility, N253.4 billion to 548,345 beneficiaries – comprising 470,969 households and 77,376 SMEs.
Notwithstanding that all these have helped in boosting output, the committee members advised the CBN continue to aggressively increase its interventions in these sub-sectors, including agricultural processing and manufacturing. Under the National Youth Investment Fund, N2.04 billion was disbursed to 7,057 beneficiaries, of which 4,411 were individuals and 2,646 were SMEs.
Under the Creative Industry Financing Initiative, the CBN has disbursed N3.19 billion to 341 beneficiaries across movie production, movie distribution, music and software development.
On the fixed income market, the CBN disclosed plans to end Open Market Operation (OMO) bills sales to investors.
The planned phaseout of OMO, which has for years supported Nigeria’s investment climate and deepened market liquidity could lead to over $40 billion investment exit.
The market for OMOs is at $40 billion with foreigners holding about a third of the market share.
Analysts said the cost of liquidity management was getting too high and issuance of OMO bills should be a transaction between the central bank and commercial lenders.
The debt sales handed foreign investors some of the best carry returns in Africa, with many of the investors borrowing from low interest markets, and investing in Nigeria where they got nearly 30 per cent returns in dollar terms.
The OMO offerings were introduced to help stabilise the naira following the oil-price collapse in 2015.
Despite all that transpired in the banking sector, including the currency crisis, Coronation Asset Management released its report on Nigerian Banks “Nigerian Banks, Resilience Built In” showing hope was not lost in the sector.
The report shows that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle, their profitability is improving over time and their stock values are remarkably cheap compared to Ghanaian and Kenyan bank stocks.
The report, written by Ope Ani and Guy Czartoryski of Coronation Research, examined what has happened within the industry in the last 10 years, it is a unique 10-year study of the margins and profitability of six listed banks: Zenith Bank; GT Bank; Access Bank; FBN Holdings; UBA, and Stanbic IBTC.
These banks have adapted successfully to many changes in interest rates over the 10 years from 2010 to 2020. Therefore, they are well-positioned for the rise in rates in 2021.
