Central Bank Of Nigeria: Leveraging I&E Window For Exchange Rate Stability

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Having successfully used the Investors and Exporters’ (I&E) foreign exchange window to stop the naira from crashing to a record low three years ago, the Central Bank of Nigeria (CBN) is clearly determined to use the same strategy to relieve the local currency of its current Coronavirus-induced pressures, writes Tony Chukwunyem

Given Nigeria’s dependence on crude oil for about 90 per cent of its export earnings, any sharp drop in price of the commodity negatively impacts the country’s external reserves, thereby putting the naira under tremendous pressure in the foreign exchange markets and igniting calls for naira devaluation.

For instance,  the steady decline in Nigeria’s external reserves earlier this year excited speculators and led to the naira falling to as low as N465/$1  on the parallel market in late April from about N400 per dollar.

However, the Central Bank of Nigeria (CBN), which readily cites defending the naira as one of its core mandates, gives short shrift to the argument for naira devaluation.


Price adjustment

In fact, as part of its efforts to defend the naira, the CBN, on March 20, adjusted the official naira exchange rate from N307 to N360 to a dollar and also adjusted it on the Investors and Exporters (I&W) window, as well as the Bureaux De Change (BDC) segment of the market, from N366 to N380 to a dollar and N360 to N380 per dollar respectively.

Resumption of dollar sales

The apex bank subsequently followed up that move by resuming the provision of foreign exchange to all commercial banks for onward sales to parents wishing to pay schools fees and Small and Medium Enterprises (SMEs) seeking to make payment for essential imports needed to revive economic activities across the country.

Specifically, the CBN resumed the provision of over $100 million per week for both categories of forex users, even as it also announced that foreign exchange sales to the Bureaux De Change (BDC) segment of the market for business travels, personal travels and other designated retail uses, would restart as soon as international flights resume.

Although the regulator’s intervention helped to stabilise the naira on the forex markets, the ongoing Coronavirus crisis has prevented adequate forex liquidity from flowing into the market with the resultant forex scarcity triggering another bout of naira weakness.

Exchange rate unification

With the local currency sliding towards N460 per dollar on the parallel market, there have been calls from several quarters that the CBN should intensify efforts to unify its exchange rate regime.

A member of the Presidential Advisory Council and Chief Executive Officer (CEO), Financial Derivatives Company (FDC), Mr. Bismarck Rewane, for instance,  argued  on a TV programme that exchange rate unification is “inevitable” for Nigeria.

He said that given the vulnerability of the economy to the impact of the pandemic and the slump in oil prices, a unification of the exchange rate is the only wise option available to the country’s authorities.

According to him, “we have no other option but to unify the exchange rate. Lenders are going to insist on it; our commercial partners are going to insist on it; it is good for us. Exchange rate unification is inevitable.”

Interestingly, Reuters reported, sighting documents, which seemed to indicate that the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had informed the government that the country would seek to unify its multiple exchange rate regime to generate more local currency from its dollar inflows and manage the rate in a sustainable manner.

However, commenting on the issue when he participated at the investor conference call titled: “COVID-19 Economic and Budgetary Update” organized by Citibank, last week, CBN Governor, Mr. Godwin Emefiele, clarified  that the  authorities were targeting  exchange rate unification around the Investors and Exporters’ (I&E) forex window, which is also known as the Nigerian Autonomous Foreign Exchange Market (NAFEX).

He was quoted by a national daily as saying that “what we mean by exchange rate unification is moving towards the Nigerian Autonomous Foreign Exchange Market (NAFEX). NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars.

“That means that whether you are a business man, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars you can come to the market. Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business does outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX.”


Establishment of I&E window

Indeed, some analysts have pointed out that the CBN’s current efforts to ensure exchange rate stability are reminiscent of the situation a few years ago, when a significant drop in the price of oil led to decline in the external reserves and the CBN, refusing to bow to the demand of international financial institutions to devalue the naira, resorted to using various strategies, including several foreign exchange management measures, to help  the local currency  recover from a record low of N520 per dollar on the Bureaux De Change (BDC) segment of the market to N360/$1 .

One of such strategies was the CBN’s setting up of the I&E window on February 27 2017. It listed eligible transactions under the new window to include invisible transactions such as loan repayments, loan interest payments, dividends/income remittances, capital repatriation, and management service and consultancy fees.

Also, on the eligible list were software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions, including “miscellaneous payments” as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.

Even though it the CBN said it would be a  market participant at the window to promote liquidity and professional market conduct, it noted that forex supply through the window would come from investors, exporters and other forex dealers that would participate on a willing-buyer, willing-seller basis.

As Emefiele explained at the time, the I&E window was introduced as a strategy to further liberalise the forex market.

“It was designed to increase transparency in the market because the market players at that time, particularly our friends-investor community had a lot of doubts about the level of transparency in the market.

“And we felt there is the need to establish a market where you will not find the hand of the CBN; people should be free to bring in foreign exchange into the country and take them out at will, but that the CBN, in line with the foreign exchange management policy can only come in at some points to intervene, either by supplying dollars into the market or buying dollar from the market to keep the price at the level that we think is within acceptable thresholds,” he had explained.

Commending the CBN’s decision to establish the window, Fitch Ratings in a report issued at the time said the move had eased the liquidity pressures earlier experienced in commercial banks by boosting forex supply.

According to the rating agency, with the introduction of the window, investors became more willing to invest in Nigeria due to what they perceived as a fairer mechanism through which they could sell forex to willing buyers.

It stated: “In our opinion, NAFEX offers a more transparent alternative to accessing FC than is available through the other foreign-exchange markets in the country.”

Also, in a report released last Friday, Fitch Solutions Group, an affiliate of Fitch Ratings,  while describing the importance of the I&E window, said: “Nigeria’s commitment to improving business transactions and investment inflows, in addition to the central bank’s foreign exchange trading window, was a boon for investors. Investors needing to settle trade-related requirements in US dollars can do so by phone, and at rates set by the buyers and sellers themselves, rather than by the bank or the market. These moves will likely curb the market premium and push up foreign reserve levels.”

Commenting on the success of the I&E window in his speech at the annual Bankers’ Dinner last December, CBN boss, Emefiele, disclosed that the 29 months operations of the I&E forex window had helped stabilise the volatility of the naira against other currencies.

“The naira-dollar exchange rate at the I&E Forex window has remained stable for the past 29 months at N360 – $1 and we have witnessed significant convergence in the exchange rate across the various market windows,” Emefiele said.

Significantly, as the CBN governor also pointed out at the Citibank conference last week, while the naira might  currently  be under pressure in the unofficial and shady  parallel market, it has remained stable on the I&E window.

He said: ”The more market determined rate, which is the Investors and Exporters’ window has stabilised at about N388 to a dollar since the last two months. The expectation is that liquidity would continue as forex inflows resume with the recovery in the price of crude oil and capital flows. So, we are not going to be talking about the unification of our exchange rate around rates for people who are dealing in corrupt practices. Everybody who wants to buy or sell forex is allowed to deal through our NAFEX market. That is the market that is recognised and that is why we are saying unification is going to be around the NAFEX.”


The consensus in financial circles at the weekend was that since the I&E window succeeded so spectacularly in stemming the naira’s slide three years ago, the CBN has strong grounds for deciding to use the same strategy to defend the local currency during yet another period when the slump in oil prices is posing serious challenges for the country.   

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