A primary issue affecting Nigeria’s economy in recent years has been the decline in foreign reserves, particularly the shortage of US dollars, which have been hit by low oil prices. This slump in the price of oil has caused major complications for the Nigerian economy as a whole, particularly given the increasingly high demand for imports ranging from industrial equipment to food staples.
A decreasing volume of dollars in circulation led the Central Bank of Nigeria (CBN) to restrict access to foreign currency and institute capital controls in 2015 – measures aimed at sustaining the country’s existing reserves. However, the situation has begun to shift in recent months, with the CBN easing some controls in early 2017.
Emboldened by the success of Nigeria’s two eurobond issues and higher levels of oil production, the CBN has significantly increased foreign exchange (forex) liquidity in the market. While the list of 41 imports banned from seeking forex at the official rate remains in place, there has been a softening of currency controls for other purposes, along with regular CBN intervention in the forex market, which has sought to increase the accessibility of dollars in 2017. For example, in June 2017 the CBN injected $195m into the markets in order to meet customer demand, with $50m going towards small and medium-sized enterprises.
Additionally, the central bank increased the limit on foreign currency borrowing by banks – including eurobond issuances – from 75% of shareholders’ funds to 125%. Observers have noted that recent measures have provided a degree of flexibility for borrowers. “The CBN had placed a limit on foreign currency borrowing by banks at 75% of shareholders’ funds, unimpaired by losses to manage forex exposures by banks,” Henry Okoye, an analyst at Coronation Merchant Bank, told OBG. “However, the recent review has provided some flexibility, and could possibly drive forex inflows through bank borrowing, foreign direct investment, foreign portfolio investment or loans to other corporations.”
Before raising the cap on forex borrowing, the CBN took a variety of steps to help mitigate any additional currency risk. In June 2016 it allowed for the trading of forex futures, purely as a hedging tool. “Before the launch of the forex futures market we had forex hedging tools, but they were not sufficient for the type of volatility experienced in the market,” Okoye told OBG.
Listed exclusively on the FMDQ’s over-the-counter Securities Exchange, the growing forex futures market features only one seller, the CBN. In order for banks and their clients to purchase a futures contract, and to reduce speculation in the nascent market, the entity must submit documentation to the CBN demonstrating upcoming forex exposure. “If banks are going to borrow, the CBN stated there must be some sort of hedging going forward,” Olatunji Odesanya, CEO and managing director at Coronation Securities, told OBG. “If a bank increases forex borrowing, it should be able to go to the market and buy hedging instruments that include an option to enter into swap arrangements or futures contracts. This will ensure that no matter what position is taken, it will be hedged. This action will reduce the potential negative risks to balance sheets in the event of future currency shifts.”
While the central bank has been careful in reducing a variety of risks associated with this development, there remains some doubt in the market as to whether additional forex borrowing by banks will help to make a material difference in the economy. “In the near term it will not have any effect. It could ease liquidity from forex if there was to be a significant liquidity crunch in the near to medium term, but I don’t expect there will be,” Olubunmi Asaolu, head of equity research at FBN Capital, told OBG.
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