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Analysts: BDCs’ dollar sales bolster naira in forex markets

Although foreign exchange scarcity continues to persist in the country, the naira dollar (N/$) exchange rate has largely remained flat on the Investors andExporters’( I&E) windowaswellas the parallel market, due to the Central Bankof Nigeria’s(CBN) supplyof dollarstoBureauxdeChange( BDC), analystsatCoronationResearchhavesaid.

In a note obtained by New Telegraph at the weekend, the analysts said: “Last week, the foreign exchange rateheldessentiallyflat, withtheNaira up by just 0.01 per cent against the US dollar at N385.81/US$1. This was the situation in the NAFEX market (also known as the I&E Window). “In the parallel or street market, the naira gained 1.72 per cent to close at an offer price of N457/US$1.

The two rates are now within 19 per cent of each other. We attribute recent strength in the parallel market rate to the Central Bank of Nigeria’s (CBN) supply of US dollars to Bureaux de Change (BDC).” Citing a recent report by Nova Merchant Bank, New Telegraph had reported last Monday that the CBN sold a total of $1.54billion across the various segments of the foreign exchange markets in the month of September. Specifically, the report showed that the apex bank, during the period intervened at the I&E window, also known as the Nigerian Autonomous Foreign Exchange Fixing (NAFEX), to the tune of $435 million; sold $295 million to BDCs; $400million to the Small and Medium Enterprises (SMEs), Invisibles and Secondary Market Intervention Sales (SMIS) retail and wholesale- segments and $407 million for non-auction transactions.

The CBN had resumed dollar sales to BDCs on September 7 after suspending such sales in March due to coronavirus restrictions. Currently, the regulator sells $20,000 weekly (in tranches of $10,000 on Mondays and Wednesdays) to each of the over 5,000 licensed BDCs in the country, which buy at a rate of N384/$1 from the banking watchdog and are required to sell at not more than N386/$1 to end-users.

Despite the naira’s recent stability against the dollar in recent weeks, analystsbelievethatthelocalcurrency will continue to be under pressure on the parallel market, due to the backlog of unsatisfied demand for dollars, coupled with rising demand for forex, caused by the increase in economic activities in the wake of the gradual lifting of coronavirus restrictions. For instance, Nova Merchant Bank stated in its report that “with foreign portfolio inflows expected to remainmeagrefor therestof theyear, amidst still lowcrude oilprices, we expecttheCBN tocontinuetomanageits dollar supply.

Particularly, we expect the FX supply for Foreign Portfolio Investment( FPI) repatriation to remain lower than the required demand with suchfundscontinuallydominatingdemand atprimarymarketfixed income auctions. Going from the above, we now expect a base-case FX supply for FPIrepatriationtoaverage25percent of the backlog and maturing offshore holdingsbetweenOctoberandDecember, which byour estimate should sum up to $5.35 billion. “Assuming 15 per cent repatriation of backlog and maturing offshore holdings between October and December, cumulative sale should amount to $3.52 billion.

Coupled with our modelled FX sales to BDC operators of $1.1 billion over Q4 and sales across other segments, we expect the gross foreign exchange reserve to close the year at $30.9 billion on our base scenario and $32.8 billion on our best-case scenario.”

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