Nigeria: tighter FX regulations underlines NGN pressures

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In a move that underlines the growing pressures in the domestic foreign exchange (FX) market, the Central Bank of Nigeria (CBN) has issued a circular banning banks from accepting FX cash deposits. The move, announced on August 5, was partly driven by many banks recently deciding to decline to accept such deposits due to pressures arising on several fronts.

The banks’ reluctance to hold dollar cash deposits partly arises from earlier changes in the CBN’s FX regulations, some of which placed a 72-hour limit on FX utilisation, and a ban on importers of 41 goods and services from accessing interbank or BDC markets. Banks have struggled to accommodate a growing amount of dollar cash deposits, claiming that physical space to hold dollar notes has all but been used up.

Banks are aware that by holding such large levels of cash they are more prone to robbery. Some banks have tried to reduce their exposure by spreading their dollar cash holdings across several facilities.

Analysts say the CBN’s most recent action will help reduce the amount of dollars circulating in cash locally, some of which has been used for speculative bets against the naira (NGN). They say by cutting out of the system dollars circulating in cash, the CBN will reduce pressure on the NGN.

‘Moreover, this latest tightening of exchange rate regulations means that exchange rate policy is, de facto, becoming more managed. The greater the level of FX market stipulations and regulations, the greater the need for a large cushion of FX reserves with which to support the NGN at the current level – or an increase in the level of regulations is necessary to manage the exchange rate,’ one analyst said.

The CBN appears to be moving towards a harder peg to the from the current managed float regime. Without a rise in oil prices, FX reserves remain under pressure. ‘Without any increase in oil revenues, we expect the current stiff regulatory FX environment to be maintained or even tightened further,’ said Ecobank in a research note.

‘While this helps support the short term view of the exchange rate remaining at around NGN199:$1, it makes the longer term outlook less secure, particularly if oil prices continue to fall again and/or FX reserves remain relatively low. For the immediate period ahead, we think NGN199:USD1 will be maintained. However, the prospect of another devaluation in the months ahead has risen unless oil prices start to rise soon Without a rise in oil prices, FX reserves remain under pressure,’ the bank added.

Without any increase in oil revenues, it is expected the current stiff regulatory FX environment will be maintained or even tightened further. While this helps support the short term view of the exchange rate remaining at around NGN199:$1, it makes the longer term outlook less secure, particularly if oil prices continue to fall again and/or FX reserves remain relatively low. ‘For the immediate period ahead, we think NGN199:$1 will be maintained. However, the prospect of another devaluation in the months ahead has risen unless oil prices start to rise soon,’ said Ecobank.

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