CBN forex reform attracts $1bn forex weekly—Fitch

Fitch Rating Agency has said that the CBN investors/exporter forex window is attracting about $1 billion weekly. This it said has resulted in considerable improvement in Nigerian banks’ ability to access foreign currency since the Central Bank of Nigeria (CBN) introduced a foreign exchange “window” at the end of April aimed at investors and exporters.

The Rating Agency in its release in London said “The Nigerian Autonomous Foreign Exchange Rate Fixing mechanism, commonly referred to as the “Investors’ and Exporters’ FX Window”, appears to be boosting foreign exchange supply and the flow of foreign exchange liquidity into the banking system. Improved access to forex means that liquidity pressures have, for now, eased for Fitch-rated banks.“

Continuing it said foreign currency was in acute short supply through much of 2016 and early 2017, restricting imports and forcing several Nigerian banks to extend maturities on their trade finance obligations. NAFEX provides investors and exporters with a more transparent mechanism through which they can sell foreign currency to willing buyers. Authorised banks act as intermediaries, clearing funds supplied by portfolio investors and exporters and ensuring timely execution of settlement for buyers.

“Despite its short record, volumes transacted through NAFEX are growing. In our opinion, NAFEX offers a more transparent alternative to accessing foreign currency than is available through the other foreign-exchange markets in the country. Several exchange rates operate in Nigeria. The CBN was the main supplier of foreign currency during the height of the forex liquidity crisis and it still sells foreign currency to the market through regular auctions, with banks acting as intermediaries.

“Its official exchange rate is N305 to the US dollar but it sets alternative official rates at its foreign currency auctions and different rates apply for retail, wholesale, personal and small business purchasers of foreign currency. NAFEX introduces yet another exchange rate, which adds to the confusion, but its rates are set by market participants and this is already attracting greater volumes than other exchange mechanisms.

“Access to foreign currency is essential to boost growth in the country’s highly import-dependent economy. The ability of market participants to set their own rates under NAFEX is also forcing down exchange rates on the parallel markets. This is positive for the banks as it helps to draw funds back into the banking sector. Over time, exchange rates may converge, but this will depend on a range of market and political considerations.

“The CBN can intervene on NAFEX, but we understand from our recent discussions with banks that CBN interventions have been limited. NAFEX rates have averaged about N380 to the US dollar recently and volumes are reaching about $1 billion a week, according to these discussions. While the improved foreign currency access is credit positive for banks, the ratings of all the Nigerian banks remain constrained by our sovereign rating of ‘B+’/Negative.”