16 banks fund $220m with N72b at Forex forwards

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With N72 billion, 16 banks funded $220 million Central Bank of Nigeria (CBN) allocations under the Forex Forwards policy meant to stabilise the naira, it was learnt yesterday. Banks are calling for bids from retail end-users in preparation for the business travel allowances, school fees and medical bills auction. The CBN is expected to from today begin releasing weekly forex cash (every Tuesday) to commercial and merchant banks to meet needs at retail end of the market. The lenders are informing customers interested in buying Personal and Business Travel Allowances, and paying school fees and medical bills about requirements for getting forex. A CBN Financial Markets Department report released yesterday showed that 10 banks, which could not be identified as at press time, with N54 billion funded $162 million Forex Forwards for 30-day tenor maturing March 27. The wholesale intervention rate was between N330 and N335 to the dollar. Six banks, also unnamed, funded $58.52 million Forex Forwards for 60-day tenor, maturing April 25 with N18.6 billion. The wholesale intervention rate was between N315 and N320 to the dollar. The intervention, the CBN said, was meant to deepen dollar liquidity in commercial banks, sustain efforts to strengthen the naira against the dollar and ensure that forex is available to genuine users. Specifically, the drastic fall in the price of crude oil, which constitutes the largest component of Nigeria’s forex reserves, has cut dollar earnings from about $3.2 billion monthly to about $1 billion. This has negatively impacted on the value of the naira. Some of the measures put in place by the CBN to end the crisis include the first Naira-Settled Over-the-Counter (OTC) Forex Futures Market (FFM) launched on June 27, 2016 with FMDQ OTC Securities Exchange. Also, last week’s announcement by the CBN making more dollars available to commercial banks to fund Personal and Business Travel Allowances as well as settle medical bills and school fees forex users was also meant to strengthen the naira. The Naira-Settled OTC Forex Futures are non-deliverable forwards or a contract where parties agree on an exchange rate for a pre-determined date in the future, without the obligation to deliver the underlying dollar on the maturity/settlement date. On the maturity date, it will be assumed that both parties would have transacted at the spot forex market rate. The OTC Forex Futures contract is an effective exchange rate management tool supported by a transparent price driven by a two-way quote market. The contracts assist the CBN in managing the volatility in the spot forex market, thereby promoting stability and entrenching market confidence. A report by Afrinvest West Africa Limited, an investment and research firm, said the naira shed 46.5 per cent and 66.3 per cent in the interbank and parallel markets between June 2014 and January 2017. The spread between the two rates reached an all-time high of N215.00 last week. “However, the political and economic implications of the forex shortages motivated the directive issued by the National Economic Council to the CBN last week for a more flexible forex market structure and closure of the gap between interbank and parallel market rates. In light of this, the CBN issued a new policy action on the 21st February, 2017, which is expected to increase forex allocations to retail end users while reducing the demand pressures in the parallel market,” it said. The success of the CBN’s aggressive intervention and moderation in demand in the unofficial market led the naira to post its biggest one-week rally of 13 per cent in more than three years in the parallel market, appreciating from a trough of N520 to dollar to a three-month high of N460 to dollar as speculators with short naira positions sold off. “Personal and business travel allowances, school fees and medical fees have been estimated to account for less than 20 per cent of total forex demand in the country, hence there is still a large volume of demand that could pressure rate at the parallel market. While we believe the successful implementation of the new FX directive would ease pressure in the parallel market, flexibility in pricing and allocation in the interbank market remains a necessity to restore confidence in the system,” the firm said.

 

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