Why Nigeria’s gathering Forex storm could be end game for businesses

A picture is emerging of the roots of the foreign exchange struggle faced by Nigeria’s businesses and how it could be a lost battle if the Central Bank does not act quickly.

According to Bloomberg, Nigeria’s foreign-currency shortage is squeezing life out of the economy with Banks no longer honoring card payments and foreign investors unable get their money out of Nigeria, a situation compounded by the inability of manufacturers to import vital raw materials as crumbling pushes Africa’s largest economy towards a second contraction in four years.

The situation has been compounded by the fears that Diaspora remittances into the country could fall to $17 billion in 2020, a 32 per cent drop from the $25 billion inflows recorded in 2019, according to projections by Financial Derivatives Company (FDC), a consultancy company led by renowned economist Bismarck Rewane.

Data from FBNQuest Capital covering Q1 2020 shows that the Central Bank sold a total of $13.38 into the economy via its various windows for the first three months of this year.

According to the data, the CBN was most active at the investors’ and exporters’ window (I&E, or NAFEX.) where it sold $4.6bn during the period and the BDCs which got a total of $3.7bn in the same period.

The apex bank sold $1.68bn through the SMIS window and another $1.3bn via other interventions in in Q1 2020.

The pain and desperation faced by businesses can be better seen in the fall in CBN inflows since March now measured by total weekly supply of around US$100m down from more than US$1bn weekly in the first quarter of this year.

 The FBNQuest analysts said the CBN was the largest seller in Q1 at the I&E as the maturities of its open market operations (OMO) bills gathered momentum and foreign portfolio investors (FPIs) departed in large numbers.

The bureaux de change were the second largest destination of CBN sales in Q1. These transactions were halted with the suspension of international travel in March but may now resume now that the FGN is talking of reopening borders for air traffic.

Secondary market intervention sales (SMIS) to retail, both spot and forward has become the leading destination in Q2.

Said the analysts, “while the CBN does not quantify its total exposure to swaps within its series on gross official reserves, it does share quarterly inflows and outflows under such arrangements. We see that it sold US$600m in the quarter under review, and US$470m in the previous three months, to meet its swap obligations.

“When we move onto fx flows through the economy to cover autonomous sources as well as the CBN for Q1 2020, we have a total inflow of US$42.7bn and a total outflow of US$19.0bn. Such an inflow would probably cover fx demand when we recall that imported goods and services in 2019 amounted to about US$100bn.

BusinessDay investigations show that emerging GDP data for Q2 point to an inevitable economic contraction of frightening proportions. And as was the case in 2016, the failure of monetary policies is worsening the impact of Covid-19 on the country.

Dependent on oil exports for half of its revenue, the Nigerian government’s coffers have emptied after crude prices plunged in the wake of the coronavirus pandemic.

There’s little prospect of a respite any time soon: it needs oil prices of $70 per barrel and production of 2 million barrels a day to balance its budget, but prices are hovering around $40 and OPEC curbs have restricted the nation’s output to about 1.4 million barrels a day.

The evaporation of foreign income forced the central bank to halt weekly interbank foreign-currency sales since March. Now the effects of the dollar shortage are seeping through to the economy and inflicting pain on Nigerians and their businesses.

“A lot of the members can’t access the amount of dollars they need from the banks,” said Eke Ubiji, executive secretary of the Nigerian Association of Small and Medium Enterprises. “That is constraining business.”

Lenders including Guaranty Trust Bank Plc, Nigeria’s biggest by market value, is delaying the payment of dividends to its holders of global depository receipts, GDRs because of difficulties in sourcing dollars.

The bas also cut the amount of foreign currency customers can spend on payment cards abroad to a mere $100 a month from $3,000.

“When you source your own dollars, they won’t let you pay in cash into your account and won’t let you transfer to your suppliers,” Mgbeahuru said by phone from the southeastern commercial hub of Onitsha.

Many banks are following a template they used when they went through a similar contraction in 2016, which was to cut customers’ foreign payments and wait for crude prices to recover before raising the limits.

Central Bank of Nigeria spokesman Isaac Okorafor didn’t respond to a call and messages seeking comment.

“The challenge with dollar liquidity is an industry-wide problem,” said Bridget Oyefeso-Odusami, a spokeswoman of Stanbic IBTC Bank Plc, which cut its customers’ card spending to $500 monthly.

The shortage of foreign currency is forcing some companies to consider closing down, said Ubiji.

“If that happens, it has a ripple effect, which is loss of jobs,” he said. “We wish the situation changes for the better.”

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