With FX liquidity challenges mounting, the Nigerian Exchange Ltd. is proposing dollar bonds for companies operating in the country’s free trade zones and those earning foreign currency. 

Nigeria’s FX reform has excited the markets, but it has hurt some of its biggest firms struggling to access dollars to import raw materials. The depreciation of the naira also affected their revenues. Guinness Nigeria Plc declared a loss of N18.2 billion in 2023 compared to N15.7 billion profit in the previous year. Nigeria hopes that a dollar-denominated bond listing proposal will ease its FX troubles. 

On Tuesday, Bloomberg reported that the Nigerian Exchange Ltd. (NGX) wants companies operating from the country’s free trade zones and those earning foreign currency to issue bonds and offer equity denominated in dollars.

Like bank loans, bonds are debt with interest rates issued over a period. Companies raise capital by issuing bonds, basically borrowing money from bond investors. For dollar bonds, the catch is attracting more investors since there will be less currency risk for U.S.-based creditors. Rather than source for dollars in the market, these companies can issue dollar-denominated bonds and get dollars to run their operations. The NGX believes this move could improve FX liquidity. However, experts are skeptical about the proposal and its impact on the FX market. 

A research analyst, Basil Abia explained that the intervention will only address the dollar shortage in the short term but can’t solve the FX problems. “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 told TechCabal. He added that there might be shortfalls in the capital market’s expected liquidity.

Nigeria’s FX market is already grappling with a lack of liquidity. There is a backlog of FX demand estimated at around $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 financial analyst told TechCabal. 

The consensus is that Nigeria’s FX crisis is structural: the country doesn’t generate enough FX. According to Abia, fixing the problem requires medium and long-term solutions such as increased production levels, more exportation, ease of doing business, and ease of engaging in trade swaps. 

The CBN’s attempt to unify the FX rates has failed to materialise due to the bank’s inability to meet demand, creating sharp differences in price on the parallel market from the official I&E window. Despite collapsing the FX windows, CBN maintains a list of 43 illegible items for FX. Experts have said the restriction negates the idea of the unification of the exchange rates and creates a demand for the parallel market. In the June 2023 edition of the Nigeria Development Update (NDU) [pdf], the World Bank advised the removal of the restrictions. It remains to be seen if the CBN will rethink the policy.

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Ganiu Oloruntade Reporter, TechCabal

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