How Nigeria can resolve exchange rate pressures – World Bank
The World Bank has advised the Central Bank of Nigeria (CBN) to allow further adjustment of the naira at the official window, to reduce the persistent foreign exchange pressure in the country.
Allowing further gradual adjustment in the Investors and Exporters Foreign Exchange (IEFX) rate, where the CBN manages the price, would help eliminate misalignment and alleviate persistent FX pressures,” the World Bank said in the report titled ‘Nigeria Development Update’, which was released on Tuesday.
The CBN took steps to unify multiple exchange rates by adopting the IEFX window rate as its official exchange rate in May 2021. However, different windows still exist, and the parallel rate premium continues to climb, reaching 39 percent over the official IEFX rate in March 2022.
The CBN continues to supply FX to at least four windows, sometimes at varying rates. The four windows include the I&E window, the secondary market intervention sales retail window, the small and medium-size enterprises (SME) window, and the window for invisibles.
“Clarity on exchange rate policy, and transparency in its management, are necessary to attract more significant capital inflows, including foreign direct investments,” the World Bank said.
The exchange rate policy in 2022 remains focused on maintaining the IEFX rate and the official exchange rate artificially stable through foreign exchange restrictions and administrative measures.
According to the World Bank, the CBN maintains a complete restriction of FX supply to import about 45 products and firms report limited FX supply availability for other imports.
Despite the recovery in exports and economic activity in 2021, the CBN’s FX supply in the I&E window declined by 41 percent in 2021 relative to 2020. At the same time, the Nigeria Autonomous Foreign Exchange (NAFEX) remained broadly stable in 2021, the parallel exchange rate depreciated by as much as 16 percent in the context of FX scarcity.
As a result, the premium between the parallel exchange rate and the NAFEX widened from 21 percent to 37 percent. The CBN has also signaled that it would stop selling FX to commercial banks by end-2022 and has introduced an FX repatriation rebate program in February in conjunction with the bankers’ committee.
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“The benefits of a more effective exchange rate management, with a view towards a unified and market-reflective exchange rate, are more significant than in previous years. Favourable external conditions (oil prices being the highest in nine years) provide an opportunity to adjust the exchange rate reflective of market dynamics,” the World Bank added.
Naira on Tuesday after the one-day holiday declared by the Federal Government to mark Nigeria’s Democracy Day, appreciated by 0.12 percent as the dollar was quoted at N420.75 as against the last close of N421.25.
Most currency dealers who participated in the foreign exchange auction maintained bids between N413.00 and N444.00 per dollar.
At the parallel market, the local currency weakened by N1 per dollar as the market closed at N606/$ as against N605 per dollar closed on the previous day.