Nigeria is projected to adopt a free-floating exchange rate regime post-election, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.
The reason is that the Federal Government is likely to borrow from the international Monetary Fund (IMF) and will have to comply with conditions including naira devaluation.
In the short-term or pre-election period, Nigeria needs to adopt a crawling peg strategy, increase foreign exchange supply and reduce punitive measures.
Naira on Wednesday depreciated by 0.06 percent as the dollar was quoted at N461.60 compared to N461.33 quoted at the last close of N461.50/$1 on Tuesday at the Investors and Exporters (I&E) forex window.
Most currency dealers who participated at the foreign exchange auction on Tuesday maintained bids between N406.75 (low) and N462.41 (high) per dollar, data from the FMDQ indicated.
At the parallel market, naira also gained 1.3 percent (N10) as the dollar was quoted at the rate of N765 on Tuesday as against N775/$1 quoted on Monday.
The foreign exchange market daily turnover increased by 19.86 percent to $48.28 million on Tuesday from $40.28 million recorded on Monday.
In his monthly presentation for February, Rewne said Naira gained 9.59 percent as the Central Bank of Nigeria (CBN) adjusted the official rate to N462/$1. Currently naira is trading within a band of N750-N765/$ compared to N815/$ in the last three months. Parallel market premium narrowed to N302/$ from N399/$, he said.
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He listed exchange rate determinants to include oil revenue, external reserves, import cover, terms of trade, and balance of trade -$6.6 billion.
Last week at the open market, the local currency worsened in value against the United States dollar as it depreciated by N11 or 1.46 percent week on week to close at N766/USD from N755/USD in the previous week. On the other hand, at the investors’ and exporters’ FX window, the Naira appreciated by marginal 0.05 percent week on week to close at N461.25/USD from N461.50/USD despite the growing foreign exchange pressure on the naira and the newly redesigned currency circulation battle, a report by Cowry Asset Management said.
He said manufacturers get only 5 percent of forex demand from the official window, while over 95 percent of the forex are sourced from the parallel market.
This he attributed to fall in dollar inflows, as oil earnings, natural gas price, foreign investment and Diaspora flows decline.
Foreign Direct Investment went down by 5.03 percent to $147.16 billion in the second quarter of 2022 compared to the first quarter of 2022. Also, Foreign Portfolio Investment FPI declined by 20.97 percent to $757.32 billion in the second quarter of 2022.
According to Rewane, Naira adjustments will have limited impact unless accompanied by major fiscal adjustments and the underlying policy and structural issues must be addressed
“The outcome of the election will determine what will happen to the exchange rate. The Dangote refinery is not ‘the silver bullet’.”
