Nigerian banks’ ability to access foreign currency has improved considerably since the Central Bank of Nigeria (CBN) introduced a foreign exchange “window” at end-April aimed at investors and exporters, global credit rating agency, Fitch said Tuesday, June 7.
The Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the “Investors’ and Exporters’ FX Window”, appears to be boosting foreign exchange supply and has eased an acute dollar crunch.
The aftermath of a plunge in oil revenues, which account of 90 percent of Nigeria’s foreign currency inflows, and capital controls introduced by the Central Bank which soon saw foreign capital and diaspora remittances shrink, had tipped the import-dependent country into its first economic recession in 25 years.
The Fx crunch restricted imports and forced several Nigerian banks to extend maturities on their trade finance obligations.
The introduction of the Investors’ and Exporters’ window or the NAFEX on April 24 was the CBN’s latest attempt to beat the dollar scarcity and clear a ballooning demand backlog.
NAFEX provides investors and exporters with a more transparent mechanism through which they can sell foreign exchange 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, Fitch observed.
“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,” Fitch said.
Several exchange rates operate in Nigeria. The CBN was the main supplier of FC during the height of the foreign currency liquidity crisis and it still sells FC to the market through regular auctions, with banks acting as intermediaries.
Its official exchange rate is NGN305 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 FC.
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.
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 NGN380 to the US dollar recently and volumes are reaching about USD1 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,” Fitch said.