The Central Bank of Nigeria (CBN) on Tuesday adjusted the exchange rate at the official window by 5.54 percent to N381 per dollar from N361/$, a move seen as helping to curb roundtripping.
With the new rate, the CBN has unified the exchange rate as the foreign exchange spot and forward shows that dollar was quoted at N380.69k at the Secondary Market Intervention Sales (SMIS) – a window where importers access foreign currencies.
At the Investors and Exporters (I&E) forex window, Naira was stable as the dollar was quoted at N386. 50k, data from FMDQ indicated.
Ayodeji Ebo, managing director, Afrinvest Securities Limited said this is a positive move by the CBN. The covergence of the rates across the various FX segments will curb round tripping and improve investor confidence.
The final lap he said was the improvement in liquidity at the I&E window to complement the CBN’s efforts towards a stable naira.
“We need the CBN to also intervene in the I&E window and reduce the backlogs. We expect the black market to appreciate in the near term converging towards the N400/$1 psychological level as CBN improves on the supply of the greenback,” Ebo said.
Godwin Emefiele, the CBN governor had told some foreign investors that the desire of the central bank was to achieve exchange rate unification around the Nigerian Autonomous Foreign Exchange Market (NAFEX)/ I&E rate.
The I&E forex market is Nigeria’s 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.
Earlier in the morning of Tuesday, the market opened with an indicative rate of N387.18k, representing a marginal depreciation of N0.18k when compared with N387.00k opened with on Monday, data from FMDQ revealed.
The foreign exchange daily turnover rose significantly by 918.42 percent to $103.37 million on Tuesday from $10.15 million recorded on Monday at I&E window.
Uche Uwaleke, Professor of fnance and capital markets, Nasarawa State University Keffi, said any further adjusting of the official Exchange rate by the CBN to align with the rate in the Autonomous Foreign Exchange Market has both merits and demerits. On the upside, it translates to increased naira inflows into the Federation account implying that the three tiers of government will have more money to distribute.
Also, It eliminates opportunities for currency round-tripping and sharp practices associated with having multiple Exchange rates thereby promotes transparency in the country’s forex market. By the same token, it will enable price discovery as the real value of the naira becomes established through demand and supply forces as not a few think that the naira is overvalued. Similarly, it will engender clarity in the country’s forex market with the potential to attract foreign investors.
Furthermore, the associated fall in the value of the naira in the near term could encourage non-oil exports and discourage imports thereby facilitating the government’s import substitution policy and improving the Balance of Payments. Moreover, the measure will be in line with the expectations of international financial institutions especially the IMF and the World Bank encouraging them to further support Nigeria’s economic recovery efforts.
Be that as it may, Uwaleke who doubles as and the Chairman of Chartered Institute of Bankers of Nigeria (CIBN) Abuja Branch, said abolishing the official Exchange rate and leaving the fate of the naira entirely to market forces has grave implications for an economy having a single product, crude oil, as the principal source of foreign exchange.
With oil revenue accounting for over 90% of foreign exchange, the unification of exchange rates means that the dollar-denominated components of government spending will now be done at a higher exchange rate. So, it puts pressure on external reserves depleting it in the process, worsens the burden of the country’s external debt service obligations, makes the 2020 budget unrealistic and unachievable having been based on exchange rate of N360 per dollar and by extension the recently-approved Medium Term Expenditure Framework.
Besides, essential items that have enjoyed access to forex at the official subsidized rate such as petroleum products imports will have no choice but use the single market for forex. The immediate implication is increased cost of importing petroleum products which will lead to an hike in the pump price of fuel especially now the the downstream sector is being deregulated.
It goes without saying that, in view of the import-dependent nature of the Nigerian economy, any upward adjustment of exchange rate will feed into higher inflation rates at least in the short run necessitating tight monetary policy by the CBN and high interest rate environment.
It is important to ensure that while leveraging the apsides of exchange rates’ unification, policy makers in Nigeria should ensure that the downside risks are mitigated. This, they can do by developing multiple sources of foreign Exchange outside oil, especially via Agriculture and Solid minerals, while vigorously promoting the use of domestic products and services by supporting their availability at competitive prices.