CBN’s snail-paced exchange rate unification frustrates investors

Central Bank of Nigeria (CBN) may have taken an extra step towards unifying its multiple exchange rates eventually by devaluing the naira at one of its currency intervention sales Friday, but investor’s confidence remains abysmal.

“Although it does signal that the CBN is gradually starting to come around with the idea of having one exchange rate. This single move however is hardly enough to boost investor confidence and lead to a surge in foreign capital inflows,” a South African-based money manager states.

“I think it’s clear that what Nigeria needs right now to be able to inspire significant confidence is to speedily collapse all the rates into one,” the investor says.

The CBN has now devalued the naira on two separate occasions this year amid lower oil prices, a slowdown in foreign portfolio inflows and a fast rising foreign exchange (FX) backlog.

First, it moved the official rate from N306 to N360, and has now followed it up by moving the rate at the Special Market Intervention Sales (SMIS) to N380 per US dollar from N360.

The CBN governor, Godwin Emefiele, told investors that he planned to merge the multiple rates around the Investors and Exporters window, where the naira is slightly weaker at around N386 per dollar.

“The movement in the SMIS rate is consistent with the CBN’s plan to ensure a convergence of the rates at the I&E window,” notes Tajudeen Ibrahim, head of investment research at Lagos-based Chapel Hill Denham.

“The gap between the I&E rate and the SMIS rate is now negligible, this move however does not solve the CBN’s headache completely,” Ibrahim says.

By its latest naira devaluation, the CBN is also trying to meet the World Bank’s requirement for the disbursement of a $1.5 billion loan that is partly dependent on Nigeria collapsing its multiple rates.

“Clearly, the CBN moving the rate is in reaction to the World Bank’s threat not to disburse funds to Nigeria unless there is a unification,” a senior banker tells BusinessDay.

“The market expected a circular (devaluing the naira at the SMIS window) but it is unlikely to see that because it would mean Nigeria is being put under pressure,” the source states.

A better move would have been to simply collapse the rate at the SMIS window, which is meant to provide dollars to local firms who the CBN considers critical sectors of the economy, with the I&E rate, one analyst argues.

“Let all companies previously bidding in the SMIS window just go and bid at the I&E window and the CBN can supply that market,” the analyst says.

“That will do a whole lot more for confidence than just adjusting the rate at the SMIS window,” he adds.

A senior official of the CBN confirms that the aim of declaring the SMIS rate is towards a full unification with the I&E rate.

“Yes, it is aimed at moving the rate closer to that of the Investors and Exporters (I&E) window, which traded at N386/$1 yesterday.

“From time to time, adjustment would continue to happen, either upward or downward in line with market fundamentals. Certainly, no single rate can be achieved, but we would keep moving towards I&E rate,” he states.

Towards a full unification of multiple rates

There has been a strong clamour for adopting a more market-friendly approach to managing Nigeria’s FX market, and the latest development comes 10 days after the CBN governor told some foreign investors that the desire of the central bank “is to achieve exchange rate unification” around the Nigerian Autonomous Foreign Exchange Market (NAFEX)/ I&E rate.

Emefiele had explained: “What we mean by exchange rate unification is moving towards the NAFEX. NAFEX is our dominant market for the purchase and sale of forex and it is a free market where everybody is free to sell their dollars and those who want to buy are free to buy dollars.

“That means that whether you are a businessman, a bank, CBN, and you have dollars, you can bring it to the market to sell and if you want to buy dollars, you can come to the market.

“Like some of you must have seen, three years before 2019, we saw a relatively stable forex market because the NAFEX rate and even the rate at which the central bank transacts business outside the NAFEX were substantially close to each other. So, the CBN will continue to pursue unification around the NAFEX.”

In a nine-page document released Friday, Lagos-based economist, Bismarck Rewane, who put the purchasing power parity of the national currency at N400.87 to the dollar, said he did not believe adjusting the official rate as the apex bank had done would lead to the crash of the naira.

The World Bank has long encouraged Nigeria to manage its currency rate better to remove the irritation to investors who complained against the multiple rates and the administrative adjustment of the currency by the apex bank.

The International Monetary Fund has also long called for Nigeria to merge its multiple exchange rates, saying the absence of a single rate creates confusion and deters foreign investment.