Fitch: forex market changes may ease scarcity

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Measures announced on 20 February by the Central Bank of Nigeria (CBN) may ease some of the severe foreign currency liquidity pressure faced by the country’s banks, Fitch Ratings says.

The most important aspect of the CBN’s announcement is a plan to normalise the foreign exchange (forex) interbank market, the group said. The intention is to clear the backlog of overdue foreign currency obligations owed by banks to international creditors.

According to Fitch, “these are primarily trade finance obligations owed to correspondent banks. In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it. Banks previously had to demonstrate that funds were being directed to priority sectors of the economy. The CBN says providing foreign currency to the manufacturing sector is still a priority, but with restrictions eased, larger banks with greater access to foreign currency will be free to lend to the smaller banks whose access to international funding is restricted.”

The CBN has also stated its intention to increase intervention in the forex interbank market to increase supply. The CBN has also reduced the maximum waiting times for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180. The first of these forwards was announced yesterday for $500million, with banks reported to have bought around $371million in one-month and two-month forwards. This should help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy.

The CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations. Nigeria is highly dependent on imports and Nigerian banks have long provided trade finance facilities to importers.

Currency scarcity and exchange rate weakness have made it harder for importers reliant on naira-denominated cash flows to service US dollar-denominated trade finance lines, forcing some banks to restructure their obligations with international correspondent banks last year.

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