• Friday, June 21, 2024
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BusinessDay

Searching for solution to Nigeria’s Fx quagmire

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There is often the temptation when a headache becomes recurring to think it is a unique case.

So it is with Nigeria’s foreign exchange crisis. But instead of a rocket scientist, what Nigeria needs is courage and honesty in resolving the country’s recurring dollar headache.

Take a look at this simple graph which mirrors the recurring challenges at the heart of Nigeria’s exchange-rate policy.

According to researchers at FBNQuest Capital, between June 2017 and February 2020 the US dollar was freely available in Nigeria.

Not surprisingly, the differential between the official/interbank rate and that at the bureaux de change was constant during this period. Up to May 2017 and since March this year, Fx has been in short supply and the spread considerably wider.

The turbulence either side of the period of calm reflects pressure on the balance-of-payments and reserves. As the sequence of events has repeated itself, pardon us if we are guilty of the same in that our view has remained consistent.

The FBNQuest analysts believe that calm returned in June 2017 simply because of the return of portfolio investors, the so called FPIs, in large numbers. Note that the oil price did not reach US70/b until March 2018.

The Naira has now found itself in dangerous territory for two reasons. Firstly, while the oil price has settled above $40/b for two months, Nigeria must make large oil production cuts in line with OPEC quotas.

Secondly, a new influx of FPIs would be a surprise at this time, given that exiting investors (FPIs) have been waiting since March for the repatriation of earlier sale proceeds.

Nigeria is in talks with the World Bank over a budget support loan of $1.5bn but it would seem the bank is pushing for more economic reforms including unchaining the country’s FX markets.

So far the Central Bank has been moving towards rates unification of rates since March but moving at its own pace.

This means that the much heralded I&E window has become virtually frozen. One thing the CBN can do now is to call on its reserve and briefly supply the I&E window to reduce the backlog of outstanding Fx payments and attempt to restore some calmness to the markets .

FBNQuest Capital analysts expect the I&E rate to be at around N410 at the end of the year while noting that the CBN has shown some flexibility in its market intervention lately.

However, most people do not see any chase after fair value but small rate adjustments by the monetary authorities based on prior policy pronouncements