Market News

The government needs to tighten implementation of key fiscal measures to boost inflow of foreign exchange (forex) to ensure the success of the newly-revived Retail Dutch Auction System (RDAS) by the Central Bank of Nigeria (CBN).

In a report at the weekend, analysts at Afrinvest West Africa said there is a need for an increase in oil production, remittances and greater inflow of foreign direct investments (FDI) to sustain such retail forex sales.

The RDAS forex market policy was revived last week by the CBN. It took off with $1.2 billion bids from 32 authorised dealer banks.

Transaction activity report at the auction showed that out of the transactions, bids amounting to $876.3 million from 26 banks qualified at an approved cut-off rate of N1,495.0/$ while bids valued at $313.7 million from six banks were disqualified.

Analysts from Afrinvest West Africa disclosed that in the days following the auction, the Naira appreciated 1.7 per cent at the NAFEM window to end last week at N1,574.2/$.

 “While we applaud the CBN’s efforts to stabilise the FX market, several challenges remain that questions the long-term sustainability of this approach and other stop-gap measures recently introduced by the CBN,” the analysts said.

The report titled: “Domestic Macroeconomy: RDAS Reintroduction, CPI Expectation… Will Price Pressure Streak be Broken Yet?”, said the CBN reintroduced the RDAS policy to enhance FX liquidity, address ongoing demand pressures and support price discovery.

It disclosed that the CBN reintroduced the RDAS which was previously suspended in 2015. “For context, the RDAS is a direct sale of FX by the Central Bank through the banks to the end users. The price at which the FX is being sold is usually determined by the highest accepted bid in the auction. Central Banks employ this to control FX liquidity and stabilize the exchange rate market by allowing market forces to influence currency allocation,” it said.

The auction pricing, the report said,  closely reflects existing reality in the wholesales FX market – the NAFEM rate have swung between N1,450.0/$ and N1,600.0/$ in most of 2024. This highlights the fact that the FG’s goal of bringing the NGN/USD rate to N00.0/$ by year-end is unlikely. As such, we hold to our view that for the naira to regain lasting strength, there is a need for the implementation of strategic fiscal policies to boost economic productivity.

“Without an increase in oil production (to at least 1.80mbpd), higher remittances flow through official channels (to at least $20.0bn per annum), and improved inflows of patient longer term capital (FDI of at least $10.0bn per annum), the naira would remain in the shadow of the FG’s dream target,” Afrinvest stated.

 “Meanwhile, the IMF in it’s 2024 article IV consultation note estimate Nigeria’s monthly import bill at $6.0bn, implying that the reserves could only cover 6 months imports. Regardless of the estimate considered, the FX reserves could run dry in 6 to 9 months should the magnitude of the bids at the auction ($1.2bn) be met weekly and accretion rate does not offset outflows”.

 “In addition, seasonality trends suggests that FX demand for manufacturing imports, educational commitments and summer travels peaks in Q3. Hence, we are of the view that the measure will only temper the demand pressure that is building up,” it said.

In its BIZNOMICS report, Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the misalignment of the naira has been a persistent concern for an extended period, and policymakers face the challenge of establishing its fair value compared to the market value.

 “One way of doing this is through an efficient price discovery mechanism, with options ranging from a retail Dutch auction, wholesale auction, and interbank system to allocation and rationing. The key aim is to ensure that those who need foreign exchange can obtain it at an effective price, which the retail Dutch auction system (RDAS) would enable due to its transparent approach,” he said.

According to him,  the RDAS is expected to be a solution for efficient price discovery to reduce the misalignment of the naira from its fair value.

“This would help stabilize the naira, easing the cost-of-living crisis driven by the naira’s rapid depreciation and surging inflation. The cost-of-living crisis catalyzed the ongoing 10 days of protest in Nigeria, which began on August 1. While the intensity of the protest has subsided, over 30 lives have been lost, with an estimated N800 billion worth of properties destroyed, in addition to an output loss exceeding N1.3 trillion,” he said.