The outbreak of COVID-19 in Nigeria prompted the government to halt non-essential international travels. However, beyond the aviation sector, this has to a large extent affected developments in the currency FX market.
It must be noted that the Central Bank of Nigeria (CBN) had suspended FX sales to Bureau De Changes (BDCs) since Q2-2020 – its biggest intervention window – considering restrictions on international travels, but mainly as an effective measure to managing speculative attacks on the local currency.
Also, the CBN halted sales to the Investors and Exporters window (its second-largest intervention window) since April-2020 in a bid to manage the pressure on FX reserves.
Certainly, the combined impact of these control measures is reflected at the parallel/unofficial market (currently N473.5/$) which has since diverged from the I&E rates (currently N386.0/$) as FX liquidity thinned out at the I&E and BDC segment.
However, given that the CBN premise for halting sales to BDCs remains the ban on international travels, we believe that the recent announcement by the Minister of Aviation, Hadi Sirika, that international flights would commence operation in Abuja and Lagos on the 29th of August 2020 is likely to herald the resumption of FX sales to BDCs, going forward.
Accordingly, the CBN FX market reserves, which currently stands at $35.6bn is expected to be tested on all sides in H2-2020, especially as external funding from the World Bank (c.$1.5bn) remains outstanding.
Yet, the convergence of rates in the parallel and official market will remain a function of the size of liquidity the CBN would be willing to commit to the market when international flights resume, the pace of recovery in the global economy and uptick in oil prices.
United Capital Research