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I&E Window’s silver bullet for foreign exchange crisis

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Central Bank of Nigeria’s (CBN) governor Godwin Emefiele

Precisely, April 21, 2018 marked the first anniversary of the launch of the Investors and Exporters’ (I&E) FX window, one of the globally acclaimed innovative approach to tame the country’s foreign exchange crisis by the Central Bank of Nigeria (CBN).

Although the policy came almost a year after the CBN treaded cautiously on the June 2016 announcement of a transition to a flexible foreign exchange framework, the initial skepticism, which greeted I&E window fizzled within weeks.

One month after transactions in the window, the cumulated value reached $1.9 billion. According to analysts at Afrinvest Securities Limited, the singular act of a market reflective pricing of foreign exchange, coupled with the recovery in global oil prices as well as the stability in domestic production, following cessation of militancy attacks on oil installations, reset the stage for a broad based macroeconomic rebound.

Six months later, CBN Governor, Godwin Emefiele, said the window has autonomously traded about $10 billion cumulatively. Still in dramatic turn of events, the acute shortage of foreign exchange, that businesses and individuals, particularly the manufacturers and expatriates face, as well as the speculative tendencies waned.

With the development, the exacerbating inflationary pressures, partly driven by forex pressure, began to moderate– settling at 13.3% in March 2018. The economy slipped out of recession in Q2:2017 and grew 0.8% Y-o-Y in 2017; and pressure on consumer spending power also tapered; while recovery from external sector shock materialised amid improved export figures.

Most remarkably, with returning confidence in the forex market, Foreign Portfolio Inflow (FPI) data reflected the attraction of foreign investors into the Nigerian equities market, with inflow into equities accounting for 29.7% and 49.6% of total capital and FPI flows respectively.

The analysts noted that this resulted in a 42.3% equity market return in 2017 with NSE ASI as the 11th best performing index in the World and 2nd in Africa. The equities market rally of 2017 post-forex market liberalisation saw investors taking advantage of cheap and attractive valuations, which were previously jettisoned due to demand paucity from foreign investors.

“Particularly, tier-1 banking stocks as well as premium consumer goods and industrial goods stocks drove the positive sentiment. In line with historical trend, domestic investors joined the bandwagon towards Q4:2017, especially after the gradual moderation in fixed income yields, following the FGN’s decision to restructure debt portfolio and the CBN’s cessation of long dated Open Market Operations bill offerings.

“While FPI flow recovery post I&E introduction is nearing the pre-2014 shock levels of $14.9 billion with the 2017 inflow at $7.3 billion, attraction of Foreign Direct Investment (FDI) has been steadily slow, dwarfing the 2014 annual levels by 56.9%, notwithstanding structural reforms policy document rolled out by the fiscal authority,” the analysts said.

With the window, the nation’s foreign exchange market scored a positive outlook, at least in the near term, as the International Monetary Fund (IMF), admitted that there is appreciable progress being recorded.

The IMF Director of African Department, Abebe Aemro Selassie, in October 2017, during the Africa Briefing session at the International Monetary Fund (IMF)-World Bank Group meetings in Washington DC, said Nigeria’s goal should be how to create a liquid single foreign exchange market going forward.

“It has been very good progress on reducing the imbalances on the foreign exchange market over the last several months in Nigeria, so we are encouraged on that progress.

“If you look at the gap between the parallel market and the bank rate, which was very wide initially, where businesses were complaining about not having access to foreign exchange over the last four to five months, that has changed and we are encouraged by it,” he said.

Six months later, that is, last month, the International Monetary Fund (IMF), in its World Economic Outlook (WEO), attributed Nigeria’s growth acceleration to improved oil prices, revenue, and production, and recently introduced foreign exchange measures that contribute to better foreign exchange availability.

Selassie, revalidated his earlier stance: “Relative to where things were a year ago, inflation accelerating, and the very big gap between the official and parallel market rate. Of course, things have improved significantly.

“This is in no small part due to the reforms that have been undertaken in exchange rate regime as well as capital inflows, which with the recovery in oil prices and the uncertainty around exchange rate ameliorating, have been taking place in Nigeria. Inflation has also been decelerated.


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