Dollar quoted at the rate of N702.19 at the Investors and Exporters (I&E) forex window on Thursday, the first trading day after the Central Bank of Nigeria (CBN) unified foreign exchange (FX) market segments.
Thursday’s rate was a 5.43 percent depreciation from N664.04 per dollar quoted on Wednesday at the I&E window, Nigeria’s official market.
The Central Bank of Nigeria (CBN) on Wednesday collapsed all segments of foreign exchange markets into the Investors and Exporters (I&E) forex window.
Angela Sere-Ejembi, director of financial markets, disclosed this in a circular to authorised dealers and the general public, saying applications for medicals, school fees, business travel allowance and personal travel allowance (BTA/PTA), and SMEs would continue to be processed through deposit money banks.
Traders said Thursday that demand for dollars at the black market has dropped after Nigeria’s bold move yesterday to float the naira.
The drop in demand in the black market comes as no surprise as several businesses that had turned to that market after being starved of dollars at the official market will now return to the official market for transactions.
“Nigeria’s FX reforms have commenced, proceeding faster than we had earlier anticipated,” Standard Chartered Bank said in a note by Razia Khan, head of research, Africa and Middle East, and Samir Gadio, head, Africa Strategy.
In response to Nigeria’s FX, the bank said, there is no interbank trading, trades are conducted on a matching ‘willing buyer, willing seller’ principle, and a limit of N 1 on bid-ask spreads remains in place. Nonetheless, the latest measure suggests that banks can bid higher for FX if they have a buyer willing to transact around the same price.
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The latest FX market reform quickly followed the suspension of CBN Governor Godwin Emefiele (seen as a key architect of the more restrictive FX policy) from office last Friday, and the announcement of fuel subsidy adjustment in President Tinubu’s inauguration speech on May 29, 2023. The latest FX measure took effect ahead of the announcement of a ministerial list of proposed cabinet appointments. Only days earlier, Wale Edun, a key economic advisor to the president, had pledged FX reforms within “quarters” rather than years and indicated that the different FX windows could be unified around the 650 level.
On what happens next, the bank said price discovery may initially remain poor (as was the case today) as the market seeks to assess the direction and new equilibrium of the dollar/naira.
Nigeria still faces a significant backlog of unmet FX demand. With FX reserves under pressure and oil production constrained, it is still unclear how the authorities will be able to boost FX supply. In the current environment, portfolio inflows to local currency debt appear unlikely – local rates are unattractive in real terms, and the ability to exit Nigeria is untested. However, Nigeria’s equity market has already rallied in response to FX reform expectations, and this rally will likely persist if reforms are cemented. Despite the likely difficulty of boosting FX supply meaningfully, the authorities’ intent to reform the functioning of the FX market appears clear.
“While it is difficult to forecast USD-NGN with any certainty in this environment, we adjust our FX forecasts higher in response to the latest developments; we expect an initial FX overshoot before subsequent stabilisation. Although we do not see the parallel market as a fully functioning or transparent market, and we continue to believe that the authorities would prefer to avoid depreciation to parallel-market levels (especially to safeguard fuel subsidy reforms), we do see the risk of an initial USDNGN overshoot.
“We now forecast USD-NGN at 685.00 at the end of Q2-2023 (from 480 previously), rising to 720 in Q3-2023 (520 prior), before appreciating thereafter as the market stabilises, ” the bank said.
