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Nigeria’s NAFEX adoption may be long walk from full unification

The move by the Central Bank of Nigeria (CBN) last Tuesday that saw the regulator adopt the NAFEX rate of N410.25 per US dollar on its website received accolades from many industry players as they tagged it a ‘major step’ towards full exchange rate unification.

But, analysts say though commendable, it is nothing more than recognising what was due for recognition as more than 90 percent of economic transactions were already using the rate long before it was updated on Tuesday.

The government had since March adopted the Investors and Exporters (I&E) window rate (also known as the NAFEX rate) for government transactions, the CBN retained the old N379 per dollar official rate on its website, which created some confusion for investors.

The CBN pulled down the rate two weeks ago and followed that action up by officially adopting the I&E window rate on its website where the naira is quoted at a weaker rate of N410.25 per dollar.

Issues around liquidity and restriction on dollar deposits and usage are bigger challenges to full unification than merely recognising an overdue update on the CBN website, analysts say.

“I would not expect any significant impact on the economy,” Ayorinde Akinloye, investment research analyst at United Capital, states.

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Nigeria, unlike it African peers, has continued to operate multiple exchange rate windows. The International Monetary Fund (IMF) and the Presidential Economic Advisory Council hold the view that ditching the multiple exchange rates practice, which Nigeria started in 2016 in reaction to lower oil prices, will open up the economy to badly-needed investments.

A Lagos-based economist believes the efforts at regulation of use only create artificial scarcity and ultimately keeps driving the rate down against the dollar.

“Instead of a gradual merge, liberalise the market – allow cash dollars paid into domiciliary accounts for payments and transfers. In no more than six months all the noise and speculation will disappear,” an analyst, who pleaded anonymity, says.

According to him, if the market is liberalised the naira will settle at its true value, which is higher than the current NAFEX rate.

The gap between the CBN official exchange rate and the parallel market, the rate at which most Nigerians access the dollar, deepened last Wednesday following the speculation from the recent move by the apex bank.

Naira fell in the parallel market to its lowest level in five months at N493 per dollar on Wednesday, the weakest since November 30, 2020, when the currency depreciated to N510/$.

Data collated from the black market implies a gap of N83 between the now official NAFEX rate and the parallel market rate.

“There is so much cash dollars in the economy but people cannot use it except for no more than $5,000. Even that with so many restrictions,” another analyst who asked not to be quoted, says.

As part of its efforts to curtail demand for forex and reduce the utilisation of the banking system to facilitate black market dealing in forex, the apex bank, in a guideline issued last year reduced the amount of cash dollar deposit in domiciliary accounts by 50 percent from $10,000 to $5,000 monthly.

But despite its effort to curtail the demand for the dollar, the policy by the apex bank has failed to yield results as the value of the naira has continued to depreciate. The CBN devalued the currency on two occasions last year.

The naira at the CBN’s FX window has depreciated by an average of 7.7 percent annually in the last 10 years, according to Ayodeji Ebo, head, retail investment, Chapel Hill Denham.

The continuous devaluation of the naira is a key concern for both local and foreign investors who are looking to preserve the purchasing power of their savings and investments. Foreign investors have had their money trapped in Nigeria’s debt market since March 2020 amid dollar shortage.

Dollar supply challenges in Nigeria come from its dependency on the foreign earnings from crude oil, which has continued to account for over 90 percent of the export of Africa’s largest economy. Although on the rise, the falling global crude price always reduces FX supply in Nigeria and affects the exchange rate like in 2016 and 2020.

“To have stable currency Nigeria must diversify the sources of its FX supply,” Ebo states.

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