The World Bank is proposing a pathway to an improved foreign exchange management regime for Nigeria as the local currency the Naira touched its lowest level of N502 to the dollar on the parallel market for the first time in four years.
In its half-yearly Nigeria development update titled “Resilience through reforms”, the Washington based institution said Nigeria should in the next three months mount effective communication of its exchange rate management strategy that will serve as signalling to the market at a time of great uncertainty and anxiety about the rate of the Naira. The uncertainty is already leading Nigerians to store value in the US dollar as they fear another devaluation.
Secondly, the World Bank called for the boosting of flexibility around the NAFEX to ensure it is the anchor rate to enhance Nigeria’s competitiveness while also helping reduce inflation.
Thirdly, Nigeria should do its best to strengthen NAFEX by enhancing its function as a more transparent price setting platform or mechanism.
Fourthly, the bank called for improved transparency around Nigeria’s FX auction process to build credibility.
The fifth pathway proposed by the World Bank is the use of pre-defined rate bands to control or contain possible immediate overshooting.
Sixthly, the World Bank suggested the deepening of Nigeria’s foreign exchange market by re-establishing the dollar interbank market and also by enabling commercial banks in the country to trade FX on their own behalf.
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Finally, the World Bank called for the merger of all exchange rate windows into a single window that reflects market fundamentals.
On Wednesday Nigeria’s currency weakened to a four-year low in the parallel market as Nigerians fearing more devaluation choose to store value in the dollar.
The fall comes after the central bank’s efforts to persuade banks to sell more dollars to customers appear to fail to bridge the widening gap between the official and street rates.
Unauthorized dealers were offering the naira at 502 per dollar on Wednesday from 500 last week according to abokifx.com, a website that collates the data. The British pounds sterling was being offered for N713 and the Euro for N606.
According to Bloomberg, that’s the weakest since February 2017. The rate widens the spread between the official and the parallel market rate to 22% when compared with the spot rate of 411.13 naira a dollar as of 1.55 p.m. in Lagos on Wednesday.
Nigeria, Africa’s biggest economy, has devalued its currency thrice since March last year as lower oil income, which accounts for about 90% of dollar earnings put pressure on external reserves and some people are switching their naira savings into dollars fearing further devaluation.
Goldman Sachs Group Inc. forecasts the naira could weaken to between 440 to 460 a dollar in the short term.
Central bank Governor Godwin Emefiele met with chief executives of commercial banks last week.
The lenders agreed to increase dollar supply and operate special accounts to meet the requirements of business and travellers, according to Osita Nwanisobi, spokesman for the central bank.
The central bank aims to use lenders to make more foreign currency available to buyers, at around the official rate of between 410 naira to 412 naira to the dollar to reduce pressure on the streets where rates are crashing from excess demand.
“Dollar demand is high; people are buying for storage,” Abubakar Mohammed, chief executive officer of Forward Marketing Communications bureau de change, said by phone from Lagos, the nation’s commercial hub.“There is no effect yet from any increased sale by the banks.”
The widening gap between the official and parallel rates creates arbitrage opportunities, which the central bank says it’s monitoring closely.
The central bank wants customers to report any breach to the regulator, Nwanisobi said.
“The CBN shall continue to monitor market developments and is committed to ensuring an efficient foreign exchange market for all legitimate users,” Nwanisobi said.
