The news that the Central Bank of Nigeria (CBN) has begun to clear some of its FX backlogs has spurred an appreciation of the naira in both the official and parallel exchange markets.
The naira rose to N1,004/$1 in the parallel market and around N793.28/$1 in the official window, underscoring a notable performance compared to Wednesday, when it traded at N1,142/$1 and N799.32/$1 respectively, according to FMDQ OTC Securities Exchange.
On Thursday, the market was hit with the news that the CBN is clearing its outstanding matured FX forwards with banks, stirring the naira’s unprecedented performance.
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The matured FX forwards context
Nigerian banks received dollars from investors and importers some years ago, which they then invested with the CBN in a market known as the Forward Dollar Market. When contracts in that Forward market reached maturity, the CBN was unable to make the payment due to a lack of liquidity in foreign exchange.
Now, the CBN is gradually settling that dollar obligation. This development enables Nigerian banks to reimburse their investors and secure additional funds, which in turn helps stimulate trade and improve FX liquidity.
Some banks such as Citibank, Stanbic IBTC, and Standard Chartered, have confirmed that the CBN has settled some of its FX obligations through statements.
In a statement released by its Treasury and Trade Solutions department, Citi announced, “CBN HAS DONE IT.”
The statement titled ‘Settlement of Matured FX Forwards by CBN’, said, “We have been directed to inform you that the CBN has delivered all outstanding matured forward forex.
“We thank you for your patience and cooperation and value you for your business and partnership. Please speak with your Relationship Manager or your Trade Service Professional for clarification and additional details.
“It is a gradual payment that was done secretly, CBN didn’t make a fuss about it. It started yesterday and continued all through the night.”
The bank encouraged its customers to reach out to their respective Relationship Manager or Trade Service Professional for further clarification on the matter.
Also, announcing the development, Stanbic IBTC said in a statement, “Yesterday, the apex bank began clearing the backlog of outstanding Retail SMIS obligations. The total amount cleared is yet to be ascertained.”
The development, which is said to have cost the CBN around $2.8 billion, follows several moves by the federal government to boost the nation’s FX inflow. In the past few months, the government has intensified efforts to increase dollar liquidity through borrowing. The borrowing has been executed as part of a strategy that involves securing an immediate cash loan using the expected revenues generated from a designated portion of future crude oil production.
Last month, the government moved to securitize the NLNG dividends over a period of time and use it to borrow money to curb the depreciation of the Naira against the Dollar.
The strategy has birthed the $10bn announced recently by the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, at the 29th Nigerian Economic Summit.
“In addition, from the supply of foreign exchange through NNPC, increased production, reduced expenditure, from transactions such as forward sales, from our discussions with sovereign wealth funds, which are ready to invest and provide advanced alongside that investment, there is a line of sight of $10bn worth of foreign exchange in the relatively near future in weeks rather months,” he said.
Experts have reacted to the development, with a note that it will yield positive economic impacts, especially in the aviation sector. The Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, said that besides the appreciation of the naira, the move will help close the gap in FX rates across markets.
He added that the CBN’s action of clearing forex forwards, particularly commercial letters of credit, initially with correspondent banks and subsequently with Nigerian banks, totaling around $2.8 billion, signifies that banks can secure unencumbered credit lines for facilitating the opening of letters of credit for Nigerian corporations that depend on forwards to import goods.
“Supply from the gas forwards signed between the Ministry of Finance incorporated and international banks that are officially external asset managers to the CBN for financialising five-years of dividends from NLNG that the NNPC holds 49 percent, means that the 45 percent black market premium divergence we have seen that the official I&E rates will close ranks significantly and come back within fair value.
“This is necessary to keep the price of PMS, diesel, and Jet A1 within reasonable limits and ensure that consumer goods from durable goods import do not continue inflating, especially going into the festive season,” he said.