Cardoso’s FX reforms deliver record $844m single-day trade

By Lolade Akinmurele

Turnover in Nigeria’s foreign exchange market jumped to $844 million on February 3, the highest level of trades since June 2, 2022, according to data compiled by the FMDQ Securities Exchange Ltd.

The amount is three times more than the $266 million traded on February 1.

The spike can be attributed to the latest reforms by Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), who unveiled a series of measuresthat enabled the naira to trade more freely against the dollar.

There is better transparency in the official market and banks were mandated to offload excess dollars. The CBN also removed the cap on transactions by the International Money Transfer Operators.

Analysts say there may be even more dollars to come as the banks unwind the liquid portions of their long balance sheet foreign exchange positions. That should spur further gains in the exchange rate.

The CBN last week ordered banks to limit their foreign exchange exposure to curb risks to the financial system, in the latest move to improve liquidity in the country’s volatile currency market.

The move is pushing banks to cut speculative bets against the naira, according to Ronak Gadhia, director of sub-Saharan banks research at EFG Hermes.

The increased dollar supply is already rubbing off on the embattled naira, which had suffered wild swings last week.

The naira strengthened to 1,419/$ on Monday, up from 1,435/$ Friday. The currency has gained for three consecutive days.

The parallel market rate is however not turning the corner just yet, fanning fears that it may only be a matter of time before a huge gap re-emerges between both rates again.

The dollar sold for N1,455 on the streets on Tuesday, leaving a 2 percent gap compared with the official rate.

To ensure the gap between the official and parallel market rates do not start to widen again, the CBN has to do everything possible to encourage inflows to the markets through foreign portfolio investors (FPIs) and Nigerians, sources familiar with the matter told BusinessDay.

“If supply is sustained, we are not likely to see a widening gap,” one source told BusinessDay.

“Nigerians with dollarised assets sitting in their domiciliary accounts estimated between $20 and $30 billion have to be incentivised to exit the dollar and hold Naira. There must be a way to achieve this,” the source said.

One way to incentivise dollar inflows at home and abroad is to review market interest rates in order to narrow the negative real return on naira assets.

Nigeria has one of the worst negative real returns on investment globally. The country’s inflation rate of 28.92 percent far exceeds the 8.3 percent return on the one-year Treasury bill, leaving a negative real return of 20.62 percent.

That compares with South Africa’s positive real return of 4.2 percent and Egypt’s negative of 7.3 percent.

“A good yield level on Treasury bills may entice some hedge funds (FPIs) as there may be incremental yields from a lower dollar from where they entered the trade,” an investor told BusinessDay.

UK-based Abrdn Investments Ltd said at the beginning of Nigeria’s bold FX reforms last June that interest rates would have to be between 15 to 20 percent for it to bring its funds back onshore. But the negative real return has widened since then.

Inflation rate was 22.79 percent and the one-year bill had a yield of 8 percent at the time. Today, the one year rate is unchanged but inflation has accelerated.

All eyes will be on what happens at the next Treasury bill auction to see if Cardoso finally delivers on the higher interest rate he had promised.

The interest rate on the apex bank’s liquidity mopping tool, OMO, has gone up since the governor’s appointment, but that’s not enough, according to the investors, who say the rates on T-Bills also need to be adjusted upward for the country to attract meaningful dollar supply to ease acute FX shortages.

In the meantime, the naira depreciation is spreading pain across the country with businesses and households reeling.

The wild swing in the naira in the official market in the past week has also led to the return of petrol subsidy.

There are tough days ahead for Nigeria, according to Bismarck Rewane, CEO of Lagos-based Financial Derivatives Company Ltd, who said the naira is on the path to its fair value against the dollar.

“I don’t think the naira is jinxed. It is just a currency in transition. And you can see that in 2016, it was N499 per dollar. As of Monday, it was N1,468. It had dropped to N1,531 per dollar sometime last week and started finding its way back,” Rewane, who spoke in an interview on Channels Television, said.

“So, we have tough days ahead. But the point is that you have to look at it in the context of the currency in transition to weigh its fair value,” he added. (BusinessDay)