CBN recorded $3.5bn foreign currency outflows in March -NOVA Merchant

The Central Bank of Nigeria (CBN) has recorded a total Foreign Currency (FC) outflows during the month of March amounting to $3.5 billion (-3per cent MoM), as against   a meagre $335 million foreign inflows.

In its recent monthly Economic insight, NOVA Merchant Bank observed that activities at Open Market Operation (OMO) auctions in March depicted limited foreign portfolio participation, just as local supplies of FC (ex-CBN) was only $819 million with the market recording a deficit of $2.7 billion.

The Nova report observed that the apex bank recorded its highest monthly intervention sales at the Investors and Exporters Window (I&EW) of the foreign exchange (FX) market  in March, with the gross external reserve depleting by $1.0 billion to adjusted level of $34.0 billion.

The apex bank’s net FX sales totalled $2.9 billion, compared to net sale of $1.7 billion in February.

Over the first quarter (Q1) 2019, foreign inflows summed to $3.8 billion, outflows of $9.2 billion with the apex bank’s net sales of $4.3 billion (net purchase of $4.3 billion in Q1 19).

“The lower foreign inflows amidst sizeable selloffs largely reflects the impact of the global risk-off sentiment and the dwindling reserves, both of which have limited the rate of portfolio inflows, even as more funds exit the economy,” it read in part.

While the apex bank offered a total of N250 billion in response to maturing instruments of N671 billion (with foreign holdings of 50per cent), subscription came in at just N120 billion which largely suggest low FPI participation, the lender reiterated.

Reflecting the mounting pressure on the exchange rate and gross reserve, the CBN initiated adjustments to the NAFEX and Bureau De Change (BDC) rates to synchronised level of N380/$, and upward revision of the official rate to N359.5/$ (from N307/$) to support higher oil revenue in Naira terms. Post the adjustment, the NAFEX rate has further depreciated, closing the month at N384.45/$.

As mentioned above, the apex bank initiated upward adjustments to both the NAFEX and official rates to limit pressure on the reserves in March.

But with limited inflows in sight and reduced avenues to control outflows, “we do not see the adjustments having any material impact on the reserves. As such, we believe the only option that will have any meaningful impact on the reserve is an outright floating of the exchange rate with intermittent intervention to avoid unnecessary speculative attacks,” the report read in part.

That said, analysts at NOVA Merchant Bank believe current breakup in supply chains and the effect of the ongoing COVID-19 pandemic across countries would have resulted in a sharp decline in import demands and even services

In modelling the reserve position over the rest of the year, while they have adjusted expected oil inflows to reflect the depressed oil price and the absence FPI inflows, “we also note the impact the suspension of sales to BDCs will have on CBN FX sales.”

For every month the apex bank defers sales to BDCs, about $1.1 billion is saved. Also, the minimal demand for services (especially business and personal travel allowances) and imports could also halve related FX demands. As such, the major pressure for the reserves are offshore holdings of maturing fixed income instruments, which is estimated at $10.6 billion between April and December, the analysts explained further.

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