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By Chinwendu Obienyi
The role of the U.S dollar holds a unique position in the world of finance and trade, serving as a cornerstone of the global economy.
Its global dominance can be traced back to the 1944 Bretton Woods Conference which aimed to establish a new monetary system to promote international trade and economic stability after World War II. As the United States controlled two-thirds of the world’s gold reserves at the time, the U.S dollar became the anchor currency for the Bretton Woods system.
Consequently, countries pegged their currencies to the dollar which was itself convertible to gold, making it the primary medium of exchange for international payments. Although the Bretton Woods system collapsed in the 1970s, the U.S dollar retained its status as the world’s premier currency.
This enduring appeal can be attributed to the economic stability, widespread acceptance and size and openness of the U.S financial markets. The dollar’s international role also benefits the global economy. Dollar assets offer foreign investors’ stability in value and relative safety, as the dollar tends to appreciate during periods of market stress. It also provides access to the liquidity of U.S financial markets, such as the U.S Treasury market, which is the deepest and most liquid securities market in the world.
However, the dollar has been scarce especially in the Nigerian market due to lack of supply to manufacturers, businesses and students who have been left frustrated despite recent reforms introduced by President Bola Tinubu to achieve convergence between the price quoted on the Investors & Exporters window and the parallel market. The reforms at first, appeared to work as FGN dollar bonds soared, the local stock market ballooned to a level not seen since the 2008 global financial crisis within a month. However, the impact of this was short-lived. As at August 23, the Naira had dropped to N773.42/$ at the I&E, while the parallel market read N900/$, underscoring the supply disparity between operators on the official market and the average Nigerian looking to access dollars.
Supply remains a debilitating issue keeping policymakers awake at night. Recently, the Nigerian National Petroleum Company (NNPC) Limited secured a forward extension of $3billion from Afreximbank to give government some breathing space from FX pressures. However, the recent report by JP Morgan on the state of the country’s FX reserves dampened hope on how much the NNPCL inflow can help.
Therefore, the big question remains, how does Nigeria boost dollar supply? This is why the proposal by the Chief Executive Officer, Nigerian Exchange Limited (NGX), Temi Popoola, first reported by Bloomberg, to introduce dollar listings and bonds for companies whose revenues and profits are quoted in dollars is a welcome idea.
According to Popoola, since companies earn dollars, the counterparty risk of not being able to repay those bonds dissipates. He also explained that allowing these companies to pay dividends in dollars presents significant opportunities for their shareholders.
Currently, a dearth of foreign portfolio liquidity on the exchange continues to fester despite the attractiveness of undervalued Nigerian stocks. Giving these foreign investors the opportunity to invest with their currency without risk of exit illiquidity will attract more of them to the market.
Lagos Free Trade Zone boasts of a number of industrial firms who produce and export, earning dollars for their operations. We also have companies in the oil and gas industry who fit this criteria, as Popoola noted. These companies may not view the domestic capital market as attractive if they are restricted to quoting their shares in Naira. Presently, the federal government lists its Eurobonds on NGX but there is no trading going on. Policies that can encourage such liquidity are also inexistent. There are investment funds in the country who offer access to dollar mutual funds that Nigerians invest in. These present significant opportunities to direct those funds to create value in the market and still retain their denomination.
If these assets are present on the bourse, it will catalyse the inflow of FPI which creates a reinforcing loop that further encourages Nigerians with dollars sitting in domiciliary accounts to put their dollars to work in the market.
All of these will of course not be possible with the capital controls placed by monetary policy. Countries like Jamaica, Zimbabwe have private markets that strictly trade in dollars, why not Nigeria? The dollar is the currency of international markets and everyone has to align. This requires a lot of work but authorities need to be intentional and consistent with policymaking to build trust in the system. NGX and regulators working together on this is a welcome development.
According to economic experts, dollar asset listings present a significant opportunity to direct those funds to create value in the market and still retain their denomination and could be a game changer to addressing FX supply challenges.
Experts’ react
Speaking during a programme, the Director, Research and Strategy, Chapel Hill Denham, Tajudeen Ibrahim, lauded the initiative by the FG and NGX and added that if implemented, will solve the FX scarcity problems. Ibrahim explained that the initiative can be structured as an investment trust company that will provide liquidity as an asset class.
Explaining the difference between dollar asset listing and dollar mutual based funds, Ibrahim said, “I think that these funds you are talking about are traditional mutual funds and I do not think they will be similar to the dollar asset class. As we speak, we have $720 million in the size of the mutual funds which grew from $410 million in 2020. But the reality in this case is that we have dollar scarcity, illiquidity and if we want to solve that problem, what comes to my mind is in a situation whereby we have an investment trust that will address these challenges”.
Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, sees the development as the latest efforts by the FG to shore up FX liquidity in Africa’s biggest market and the Exchange’s futuristic plan.
Chukwu, while explaining that a couple of things need to be in place to have dollar denominated bonds listings, said the bonds have to be issued as a foreign currency debt instrument locally. He said that the challenge with that is that the Naira is yet to achieve convertibility so that people can move from Naira to dollar and then from dollar to Naira.
He explained, “Currently Nigerian entities do that but they do that in Eurobonds but are listed at international bourses like the New York Stock Exchange (NYSE) or London Stock Exchange (LSE) but to have it listed and traded here means that people should be able to move from Naira position to Dollar position to invest in those instruments as well as move back to Naira at ease.
But we have not achieved that convertibility and that may be a constraint and hence why I said this is a futuristic plan of NGX but it is positive that we are thinking in that direction and it simply means that in the near future, we can achieve local currency convertibility and then we can actually trade other currency instruments on our bourse”.
Conclusion
Globally, dollar liquidity is shrinking in the face of monetary hawkishness by the United States Federal Reserve. This means countries need to improve their value propositions to investors, else capital will keep being elusive. Therefore, Nigeria needs to move fast and reposition for greatness as the latest brain thought by the Federal government through the NGX could boost the economy and provide funds for development projects.
