Dynamics within the fx market

The global oil price slide that started in mid-2014, coupled with domestic oil production issues, created volatility in Nigeria’s fx market. However, the CBN’s fx reforms and a price recovery have since brought significant improvement. The several exchange rates in operation have been relatively stable. The CBN’s interbank/official rate (for priority transactions) is currently N307/US$. This compares with N362/US$ at the Investors and Exporters (I&E) window. The parallel market rate appears to have barely moved in recent sessions. In the absence of an oil price crash, we assume that this stability will continue.


  • Alongside fx receipts from oil sales, foreign portfolio investors (FPIs) contribute indirectly to the external reserves. The elevated returns in Nigeria’s fixed income market have resulted in increased inflows from FPIs. Yields on the NTB (T-bill) market currently range between 11.50% and 15.00%.

  • We believe the CBN/MPC will maintain their hawkish stance on the policy rate, which has been 14% over the past 30 months. Although its correlation with rates on FGN paper is limited, this is a welcome signal for investors.

  • The I&E window (also referred to as NAFEX), which was introduced by the CBN in 2017 to improve fx liquidity and aid price discovery, has had visible success. Turnover at the window amounted to US$23.9bn in 2017, with the CBN accounting for 8.4% of the total, and US$60bn in 2018 (the CBN’s share was 28.3%).

  • In Q4 2018 the market experienced some capital flight from FPIs (primarily due to US policy normalisation) and the CBN stepped up to provide support by intervening in the market. However, since the start of this year, inflows from FPIs have picked up. Their funds currently account for at least 50% of inflows at the I&E window.

  • The CBN’s several fx interventions have also supported fx liquidity. For example, its secondary market intervention sales (wholesale and retail combined) averaged US$1.4bn per month in 2018. We note that its daily spot intervention slipped from US$0.5m to US$0.1m in early February. This could be a pointer that other fx market segments are fairly liquid and able to meet customer demand.

  • We also note that listed consumer goods companies under our coverage have experienced greatly enhanced access to fx for sourcing imported inputs and servicing their fx denominated debt.

  • Although the regime of several exchange rates is unconventional, we doubt the authorities are in any rush to settle for a convergence. One possibility could be another exercise in guiding the NIFEX rate (for banks) towards the NAFEX rate.

  • The dependence on one product for fx inflows will continue to pose a threat to Nigeria’s fx market. Specialised government interventions that can assist with infrastructure development as well as improve the business environment will push the economy towards achieving greater fx revenue diversification.

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