The Central Bank of Nigeria sold a whopping $36.6 billion in forex in
2018 according to a report released during the week on its website. This
compares to $15.8 billion sold in 2017, a whopping 130% rise.
report, 2018 Activity report, is aimed at “informing the public of the
measures taken by the Department to implement the decisions of the CBN
and its Monetary Policy Committee towards the achievement of price and
financial system stability.”
Key numbers: The CBN explained the
breakdown of the $36.6 billion as $25.6 billion for spot sales and $11
billion in forward transactions.
• Included in the spot sale was $8.2 billion sold in the I&E window.
The I&E window is where investors come to buy and sell forex and
its the closest to a market with an exchange rate that floats.
Total sales in 2017 were $15.8 billion lower than spot sales recorded in
2018. The bank reported that spot sales for 2017 were just $3.4 billion
compared to $25.6 billion in 2018 alone.
• Net sales (sum of forex sold and bought by the CBN) was $17.8 billion in 2018 compared to $9.7 billion in 2017
explained: The higher sales recorded in 2018 suggest there was more
demand for forex in 2018 compared to 2017. Thus, to keep the exchange
rate stable and speculators at bay, the CBN had to increase its defense
of the naira by selling more dollars. This is further buttressed by the
more than 8 folds increase in spot sales with most of it targeted at the
I&E window where foreign investors trade.
By burning through
reserves, the CBN sacrifices forex savings for naira stability hoping
that this will help drive down the inflation rate. Critics believe this
might be work in the short term but it is detrimental in the long run
when we factor in the opportunity cost of burning out reserves.
explanation: “The increased volume of transactions in 2018 was
attributable largely to the Bank’s foreign exchange policy and its
management, coupled with the improvement in the levels of foreign
reserves during the year.”
The exchange rate debacle: Most
analysts we have spoken to believe the exchange rate is somewhat
overvalued at N365. They point to frequent interventions in the FX
market by the CBN as one of such artificial dynamics that inhibits price
discovery. The more CBN intervenes to stifle demand the better the
chances of the naira holding sway at its current price.
The upshots: Now that the presidential elections are over and the Central Bank Governor guaranteed another term of 5 years, the focus will not be channeled at how the CBN plans to manage the exchange rate. Will it be more of the same or a change of course. Rumours that the CBN might devalue something this year will likely persist. Some believe it is just a matter of time particularly if oil price fails to recover past the $70 mark.