As FX liquidity challenges proceed, Nigeria is hoping dollar bonds will save the day

With FX liquidity challenges mounting, the Nigerian Exchange Ltd. is proposing dollar bonds for corporations working in the nation’s free commerce zones and people incomes overseas foreign money. 

Nigeria’s FX reform has excited the markets, however it has damage a few of its greatest companies struggling to entry {dollars} to import uncooked supplies. The depreciation of the naira additionally affected their revenues. Guinness Nigeria Plc declared a lack of N18.2 billion in 2023 in comparison with N15.7 billion revenue in the earlier 12 months. Nigeria hopes {that a} dollar-denominated bond itemizing proposal will ease its FX troubles. 

On Tuesday, Bloomberg reported that the Nigerian Exchange Ltd. (NGX) desires corporations working from the nation’s free commerce zones and people incomes overseas foreign money to situation bonds and provide fairness denominated in {dollars}.

Like financial institution loans, bonds are debt with rates of interest issued over a interval. Companies elevate capital by issuing bonds, mainly borrowing cash from bond traders. For dollar bonds, the catch is attracting extra traders since there will be much less foreign money danger for U.S.-based collectors. Rather than supply for {dollars} in the market, these corporations can situation dollar-denominated bonds and get {dollars} to run their operations. The NGX believes this transfer may enhance FX liquidity. However, specialists are skeptical about the proposal and its impression on the FX market. 

A analysis analyst, Basil Abia defined that the intervention will solely tackle the dollar scarcity in the quick time period however can’t resolve the FX issues. “So instead of waiting in line for CBN to meet their dollar needs, these companies can just issue dollar debt listings on the NGX to sort out their operations for a given period, and investors can buy these bonds,” he instructed TechCabal. He added that there is likely to be shortfalls in the capital market’s anticipated liquidity.

Nigeria’s FX market is already grappling with an absence of liquidity. There is a backlog of FX demand estimated at round $10 billion. “Dollar bonds could partially dollarise the economy and make a point for most firms to start charging and transacting in FX, which would further drive the demand upward,” Samuel Oyekanmi, a monetary analyst instructed TechCabal. 

The consensus is that Nigeria’s FX disaster is structural: the nation doesn’t generate sufficient FX. According to Abia, fixing the downside requires medium and long-term options similar to elevated manufacturing ranges, extra exportation, ease of doing enterprise, and ease of partaking in commerce swaps. 

The CBN’s try to unify the FX charges has did not materialise resulting from the financial institution’s incapacity to satisfy demand, creating sharp variations in value on the parallel market from the official I&E window. Despite collapsing the FX home windows, CBN maintains an inventory of 43 illegible objects for FX. Experts have mentioned the restriction negates the concept of the unification of the change charges and creates a requirement for the parallel market. In the June 2023 version of the Nigeria Development Update (NDU) [pdf], the World Bank suggested the elimination of the restrictions. It stays to be seen if the CBN will rethink the coverage.

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