Event
The finance minister, Zainab Ahmed, and the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, have jointly expressed their intention to move towards a unified exchange rate in a letter to the IMF appealing for US$3.4bn in emergency funds, which were granted on April 28th.
Analysis
In the letter to the IMF, dated April 21st, requesting the emergency financial assistance to help alleviate the impact of the coronavirus pandemic and the recent oil price crash on Nigeria, an intention was expressed to achieve exchange-rate unification in order to shore up foreign reserves and minimise distortions.
The IMF has for many years urged the central bank to reform Nigeria’s complex, multiple exchange-rate system and put a unified, market-determined regime in its place. However, it is not the first time that the authorities have professed a commitment to do so, only to backtrack later. For instance, when the CBN launched an interbank foreign-exchange market in 2016, it declared there would be a “single market structure” with market-driven rates after devaluing the naira following an oil price crash. But the regulator soon reverted to propping up the official naira rate once prices recovered.
The letter also expressed a pledge not to impose new currency controls or intensify existing ones. This suggests that existing restrictions will be left in place, including a bar on some categories of importers from accessing regulated foreign-exchange markets.
The CBN devalued the official exchange rate by 15% to N360:US$1 in March to achieve convergence with the more market-driven investors and exporters (I&E) window rate. But persistent pressure on the naira meant that by April 30th the I&E rate had depreciated to N387:US$1.
The CBN is likely to carry out another devaluation this year and in 2021 to align the two rates, but it remains doubtful that it will loosen its control over the official rate entirely; there is a long-held belief within the CBN that hard currencies need to be channelled to priority sectors of the economy.
This is likely to remain so while oil prices remain low and as domestic demand for hard currency picks up once coronavirus-related restrictions are eased gradually from May 4th.
Impact on the forecast
Our forecast that the official rate will be devalued to the level of the parallel rate once in 2020 and again in 2021 is unchanged. From then we continue to expect a stable official rate, and an enduring spread with the parallel-market rate.
