Naira pressure to persist as clarity on new FX policy lingers

Pressure on naira/dollar exchange rate transaction may continue this week if the Central Bank of Nigeria (CBN) delays in coming out with a clear framework on the implementation of newly introduced foreign exchange (FX) flexibility, analysts in the financial services sector have said.

The FX market in the week remained pressured by the uncertainty around the anticipated flexible exchange rate policy, which was announced to the market at the end of the last Monetary Policy Committee (MPC) meeting of the CBN.

The market, according to Afrinvest Securities Limited, had expected that the guidelines for the new flexible exchange rate regime would be communicated early enough to restore normalcy to the FX market. But the delay by the CBN on the specifics of the new FX policy further fuelled speculation within the BDC/parallel segment of the FX market, as the naira depreciated by 1.4 percent against the dollar to close at N355/$ relative to previous week’s close of N350/$.

At the official/interbank segment, however, the naira remained stable last week as the CBN again intervened at the official rate of N197.50/$. This makes it the third consecutive auction the CBN conducted at the rate of N197/$ or N197.50/$, after the market had anticipated that the apex bank would adjust its intervention rate (in order to save the external reserves) subsequent to NNPC’s announcement of a guided deregulation of the downstream petroleum sector that pegged the FX rate for petroleum importers at N285/$.

“We analysed the movement in FX reserves for the month of May-2016 and found out that it closed ($26.4bn) lower relative to the level ($27.1bn) in April-2016, implying that an approximate average of $0.7bn was used in defending the currency in May. In the interim, pending the clarity on the new FX policy, we opine that the pressure at the parallel segment will persist,” analysts at Afrinvest said in a report.

“While we reiterate our stance on the need to standardise the FX rate determination to a single market price as the CBN finalises the modality for its flexible FX regime in the coming days, we believe the apex bank needs to be wary of intervening at the rate of N197/$, which is clearly misaligned and also expands opportunity for arbitrage as well as other forms of market distortions,” the analysts said further.