The forex conundrum
THESE ARE INDEED TRYING times for financial institutions, especially banks in Nigeria. The contraction in international trade and production halts across the globe have combined to make dollar scarce to the discomfiture of many Nigerian...
THESE ARE INDEED TRYING times for financial institutions, especially banks in Nigeria. The contraction in international trade and production halts across the globe have combined to make dollar scarce to the discomfiture of many Nigerian businesses. This is because most manufacturing concerns in the country need to source their production imputs and other factors outside the country using the dollar.
As a result of the dollar scarcity, dollar deposits back home are few and far between leading to a nightmare for many. Last week, a leading international rating agency, Moody’s Investors Service, projected that Nigerian banks would see foreign exchange contraction of $5 billion as a result of decline in foreign exchange deposit and constant foreign exchange denominated loans.
Specifically, Moody’s said in a report released last week that the foreign exchange crisis facing banks in the country was attributable to low oil prices, volatile foreign inflows and lower remittances amid the pandemic, noting that the huge foreign exchange supply gap could cause a repeat of the foreign currency liquidity pressures that blighted them during a previous oil crisis in 20162017.
Commenting on the report, Analyst at Moody’s, Peter Mushangwe said: “Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016.
“Our moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to N1.5 trillion ($3.8 billion), and to N1.9 trillion ($5 billion) under our severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenges.”
Oil and gas exports contribute about 90 per cent of Nigeria’s foreign currency revenue. Crude oil now trades around $40 a barrel, substantially lower than the average price of $65 in 2019 and $72 in 2018. However, Moody’s forecasted a range of $35 to $45 over the next 12 to 18 months for crude oil price.
“Prices within that range, or lower, in the second half of the year would lead to renewed dollar shortages at the banks,” it added.
Furthermore, the report showed that Moody’s-rated Nigerian banks reduced their foreign currency funding gap to a combined N354 billion ($984 million) in 2019, from N1.436 trillion ($5.5 billion) in 2016. The ratio of foreigncurrency loans to foreigncurrency deposits at Moody’s rated banks dropped to 106 per cent at the end of 2019 from 135 per cent in 2016 as banks cut back on dollar loans while building up their dollar deposits, the report stated.
It further explained that the smaller funding gap would enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs.
“However, in the event of foreign currency deposits contracting by 20 per cent or more, banks’ funding gaps will be significant,” it stated.
“Nigerian banks have invested more of their dollar deposits in liquid assets than in 2016, improving their ability to cover sudden deposit withdrawals in times of stress. Liquid foreigncurrency assets rose 58 per cent to N4.4 trillion between the end of 2016 and the end of 2019, although this largely reflects a weaker naira.
“In dollar terms, liquid foreign-currency assets increased five per cent to $11.3 billion in 2019 from $10.8 billion in 2016. The proportion of liquid foreign-currency assets to foreign-currency assets rose to 42 per cent at year-end 2019 from 34 per cent in 2016,” it added.
The current dollar scarcity has been long in coming. For a mono cultural economy like ours, depending on one commodity for about 80 percent of its foreign exchange, this is a re-awakening development that calls for urgent action. Godwin Emefiele, governor of the Central Bank of Nigeria, has warned in the past that Nigeria may have to develop alternative forex sources to avert a situation such as this.
Presently, there are pending unmet forex demands that the CBN is still grappling with. If this situation persists for much longer, our development aspirations may be negatively impacted. There is therefore a compelling need to empower our manufacturers to product for export and earn foreign exchange to reduce the pressure on the CBN for forex supply.