Stories by Omodele Adigun

Just as the Central Bank of Nigeria (CBN) put the net foreign assets of the banking system at N8.9trillion at the end of 2016, a 57.27 per cent rise when compared with the 25.7 per cent growth at the end of the first half of the year, the same could not be said of the economy which lost a whopping $13.64 billion during the second half of the year.

The apex bank, in its just-released Financial Stability Report, which highlights developments in the nation’s financial system in the second half of 2016, stated that total foreign exchange (forex) outflow from the economy rose by 14.8 per cent to US$13.64 billion from the level in the first half of 2016.

The bank attibuted the rise in outflow to the increase in the interbank forwards settled in the second half of 2016. However, net foreign exchange inflow was up by  12.21 per cent to US$19.38 billion above the level in the first half of 2016.

As for inflows, the report states that provisional cumulative forex inflow into the economy rose by 13.3 per cent above the level in the first half to close the year at $33.02 billion.

Out of this, inflow through autonomous sources accounted for 62.3 per cent, while inflow through the CBN accounted for 37.7 per cent.  The economy recorded a net foreign exchange inflow of US$19.38 billion, representing 12.21 per cent rise above the level in the first half of 2016.

The report explains that the total autonomous inflow rose by 0.7 per cent to $20.58 billion, compared to the level in the first half of 2016 due mainly to rise in invisibles by 2.5 per cent, of which 62.3 per cent was accounted for by ordinary domiciliary accounts. Forex inflow through the CBN moved up by 42.9 per cent  to US$12.45 billion due to increases in crude oil and non-oil export earnings. Receipts from crude oil sales rose by 22.7 per cent to $5.66 billion in the first half of 2016. This was attributable to the gradual increase in domestic production and international crude oil prices. The non-oil receipts rose by 65.5 per cent to US$6.79 billion in the second half of 2016, due mainly to increase in other official receipts.

Forex outflow through the CBN rose by 15.5 per cent to $12.39 billion, above the level in the first half. Of this amount, interbank utilization accounted for $7.99 billion, of which inter-bank forwards, inter-bank sales and others stood at $4.17 billion or  52.14 per cent, $0.72 billion (8.92 per cent) and $3.11 billion (38.9 per cent) respectively.

Overall, the total foreign exchange transactions through the CBN resulted in a net inflow of  $0.58 billion in the second half of 2016, compared with a net inflow of $0.96 billion in the corresponding half of 2015. This is, however, in contrast to a net outflow of $2.03 billion in the first half of 2016.

As for the forex market rates, the exchange rate of the naira at the inter-bank segment, opened at N282.25/$ on July 1, 2016 and closed at N305.00/$ on December 30, 2016. Similarly, at the BDC segment of the foreign exchange market, the selling rate opened and closed at N348/US$ and N490/US$, respectively. This represented depreciation of 7.46 per cent at the inter-bank and 28.98 per cent at the BDC segments of the market.

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On monthly average basis, the exchange rates at the interbank and BDC segments depreciated by 24.07 and 22.72 per cent from N231.76/US$ and N351.82/US$ in June 2016, to close at N305.22/US$ and N455.26/US$ in December respectively. The depreciation of the naira at the interbank and the BDC segments was due to the scarcity of foreign exchange and sustained demand pressures.

Foreign Exchange Spot, Forwards and OTC FX Futures Transactions

During the period, total CBN forex sales was $2.94billion. Of this, inter-bank spot sales amounted to $575.50 million, while forwards through special market intervention sales (SMIS) was $2,364.55 million. The SMIS were directed to critical purposes including raw materials and machinery, petroleum products, airlines, and agriculture.

Potential Risks/Challenges in the Foreign Exchange Markets

The implementation of the flexible exchange rate regime faced some challenges including:

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