Lockdown, FX Scarcity Scare Take Toll On Economy

Lenders to limit debit card spending abroad to ease FX Risk

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Scarcity of forex occasioned by the fall in the prices crude oil in the international market, Nigeria’s main export and source of foreign exchange, have started taking toll on the economy.

Indications during the week were that banks in the country plan to reduce the amount customers can spend abroad using debit cards, this it was disclosed is in a bid to limit foreign currency settlement risk.

The country is facing dollar shortages because of the sharp fall in the price of oil, Nigeria’s main export, and domestic banks are trying to avoid transactions with hard currency.

Stanbic IBTC Bank, the local unit of South Africa’s Standard Bank, said it will halve the spending limit for offshore card transactions to $500 per month from Monday and will limit cash withdrawals to $100.

Another top tier lender Zenith Bank said it will temporarily suspend the use of debit cards abroad for cash withdrawals and cut the monthly spending limit abroad by more than half to $200.

“This review is in response to today’s economic realities,” Zenith said in a notice, advising clients to request prepaid dollar cards.

The Central Bank of Nigeria (CBN) in a bid to conserve dollar reserves that are down 19 per cent from a year ago. Last week it depreciated the currency on the official market prompting the naira to weaken on the black and over-the-counter spot markets. Bankers told Reuters that it now takes more than six months to settle foreign lines of credit.

Nigeria is yet to resume forex sales to retail currency traders after it banned international travel as part of a lockdown measure to slow the spread of the coronavirus that has killed 778 people and infected more than 36,000.

Dollar shortage puts pressure on blackmarket rate

The naira’s black-market rate declined to 472 per dollar on Monday from N465 on June 15, according to abokiFX.com, which collates rates from street traders in Lagos.

That’s the weakest since February 2017 and compares with 12-month forwards that traded at 456.65 as of 1:20 p.m. in Lagos.

In the official spot market, the unit weakened 0.2 per cent to  389 per dollar. “A lot of the challenges right now are due to a shortfall in liquidity,” Douye Mac-Yoroki, an analyst at Lagos-based Investment One, said by phone.

“The central bank is holding on to as much dollars as it can, given that inflows are not coming the way they did previously.” Nigeria’s dollar shortage was exacerbated by the outbreak of COVID-19 and lackluster prices for crude oil, which accounts for more than 90 per cent of the country’s foreign-exchange earnings and more than a half of its revenue.

The Central Bank is struggling to clear a backlog of dollar demand by foreign investors, while manufacturers are finding it difficult to access the greenback to import raw materials. Customers, who can’t obtain dollars from CBN or other official sources, are being forced into the parallel market, pushing that rate higher, Mac-Yoroki said. “A lot of pressure is piling up there,” he said.

Meanwhile, as the worldwide race for a coronavirus vaccine gathers pace and fiscal stimulus uplifts global sentiment, investors seem to be favouring riskier currencies at the expense of the dollar.

The naira has struggled to exploit the improving market mood, with the local currency weakening to N472 to a dollar at the parallel market in Lagos. Bloomberg reports that even before the health crises infected Nigeria, the economy was dealing with uncertainty triggered by domestic and external risks.

2020 will be a critical year for Nigeria, at the country juggles with volatile oil prices, rising inflationary pressures and wounds inflicted from strict lockdowns.

Forex restriction for maize import may increase pressure on naira

The Central Bank of Nigeria’s decision to add maize/corn imports to its foreign exchange exclusion list is likely to lead to a further weakening of the naira on the parallel market, analysts have said. In a circular to deposit money banks (DMBs) posted on its website last Monday, the apex bank directed the lenders to immediately discontinue the processing of Form M for maize/corn importation into the country. Analysts said that the directive meant that CBN had added maize to its forex restriction list.

The list, which originally had 41 food and non- food items on it when it was drawn up by the regulator in 2016, lengthened to 44 items with the inclusion of maize.

According to the analysts, the development will shift demand for forex to the unofficial parallel market thereby piling more pressure on the naira. Reacting to the forex restrictions, analysts at leading non-bank currency broker, AZA, said in a note obtained by New Telegraph that “pressure mounted on the naira …as scarcity of dollars weakened parallel market rates to 470 and official rates to 386. New restrictions imposed by the CBN denying dollars for imports of maize and corn are likely to drive sustained pressure on the currency in coming days.

“The bar on FX transactions for import of the commodities would take the number of items restricted from the official market to 44.

While the directive is aimed at encouraging domestic food production through import substitution, widening restrictions on FX transactions further drives trading to the unofficial market, complicating the CBN’s stated goal of unifying multiple currency rates.”

– New Telegraph.

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