March 17, 2022

by CardinalStone Research

Nigeria reels from sustained FX illiquidity, with repatriation-related demand largely undermined by unorthodox policy measures. This multi-year FX impasse has resulted in notable responses from Deposit Money Banks (DMBs) and the Central Bank of Nigeria (CBN) in recent months. In particular, DMBs have moved to adopt some or all of the following measures: 1) temporary suspension of international ATM withdrawals and POS payments and 2) the downward review of spending limits on cross-border payments (See figure 1). In our view, these reactions may have been linked to a likely reduction in CBN dollar supply, despite the apex bank’s earlier reassurances of its determination to meet genuine dollar demand (through the banks) after the halt of sales to BDCs in July 2021.

That said, the CBN’s introduction of the RT200 FX Programme, aimed at realising $200 billion over the next 3-5 years (average of $40.0 billion per year), offers some hope of a stronger regulatory drive to arrest the crisis over the medium term. The programme acknowledges the need to diversify Nigeria’s export earnings from a strong reliance on hydrocarbon-related inflows (see Figures 2). The scheme is expected to incentivise the private sector and is anchored on the following five (5) pillars.

• Value-Adding Exports Facility: This represents long-term concessionary funding for exporters of semi-finished or finished non-oil products aimed at expanding production capacity.
• Non-Oil Commodities Expansion Facility: This is a design to provide concessionary funding for the export of local commodities for which Nigeria enjoys comparative advantages.
• Non-Oil FX Rebate Scheme: Here, the scheme guarantees naira rebates for non-oil exporters who provide verifiable evidence of export repatriation and sales to the I&E window.
• Dedicated Non-Oil Export Terminal: This is aimed at decongesting ports and improving access to export facilities.
• Biannual Non-Oil Export Summit: This is a review and brainstorming event involving all relevant stakeholders in the export business. These stakeholders include bankers, customs officials, the Nigerian Ports Authority, etc

Our assessment of DMBs and CBN responses to FX-related worries

In our view, Nigerian DMBs have switched to a more proactive mode, primarily geared towards controlling the pace of growth of their FX liabilities. This drive underscores the ubiquitous setting of new comfort levels for FX transactions that are likely to reduce the rapid accumulation of FX obligations and provide legroom for treating backlogs. The recent switch could also inadvertently protect the net FX positions of DMBs, leaving leeway for revaluation proceeds in the event of naira devaluation.

Elsewhere, we believe the CBN’s decision to diversify Nigeria’s export earnings is a step in the right direction, given the historical dependence on volatile FX sources such as oil and FPIs. However, the aim to grow export earnings to $200 billion over the next 3 to 5 years appears overly optimistic (the scheme assumes that non-oil exports would grow 7.3x from the 10-year average of $4.9 billion in each of the next five years (see Figure 3). Our cautious position on this target is primarily hinged on the structural impediments within non-oil that the apex bank could find difficult to resolve on its own.

To expound on the premise, we first note that Nigeria’s non-oil sector FX proceeds are principally derived from manufacturing and agriculture ( see Figure 5), wherein structural issues outside the scope of the CBN have mostly constrained activities. For example, despite an aggressive monetary intervention, growth in the agric sector has remained capped between the 2.0% to 3.0% band due to insecurity malaise since 2015. The current band is even significantly lower than the mean 4.2% growth recorded between 2011 and 2014, which coincided with lesser CBN interventions and more tolerable security conditions.

CBN rebate scheme: an admission to potential de-facto naira devaluation?

In a separate circular, the CBN released the operating guidelines for the rebate scheme, designed to incentivise the repatriation of non-oil sector export proceeds through the I&E Window. The scheme introduced a tiered rebate: N65 for every $1 sold to Authorized Dealer Banks (ADBs) for third-party and N35 per dollar sold for personal use. In our view, this N35/N65 rebate suggests a potential switch of CBN’s exchange rate tolerance band (for most transactions) to N450/$ – N480/$, which may be interpreted as a backdoor devaluation and a pointer to continued multiple exchange rate regime. Coincidentally, the lower band of the range is consistent with the 1-year Non-Deliverable Forwards (NDFs) rate of N449.7/$ – a key indicator of future currency expectations — and 2.3% higher than our communicated blended fair-value estimate of N440/$.

Despite the CBN’s efforts, we think that the parallel market rate (N578/$), which continues to trade at a premium, will likely disincentivise exporters from selling FX proceeds at the I&E window. Hence, the underlying issues of non-supply of FX to certain classes of demand (which has been the primary driver of parallel market pressures) may still need addressing.

RT200 and concerns over CBN supply to banks

The CBN indicated plans to halt FX supply to the DMBs by the end of 2022 during the Q&A section of the last Bankers’ Committee meeting. In our view, the move is likely to drive banks to focus on other FX sources, such as increased transactions with export-oriented businesses, FX swaps, and Eurobond issuances.

While the CBN’s plan justifies the need for accelerated credit exposures to export-oriented sectors, we believe that banks will remain cautious to avoid a deterioration in asset quality. Elsewhere, we opine that the decision could cause banks’ recent reduction of cross-border transactions limits to linger. We also see scope for banks to increase rates offered on domiciliary accounts.