The five trading days foreign exchange market ended on Friday with Nigeria’s currency gaining 0.39 percent against the dollar on the black market but exchange rate disparity between the official and alternative markets remains a concern.
This arbitrage is driven by supply shortage with attendant speculation and affects businesses that pay a higher premium to buy dollars.
As of Friday, the exchange rate spread between the Central Bank of Nigeria (CBN)’s rate of N410.11k (as posted on its website) and the bank rate of N420, was N9.89k per dollar.
The exchange rate gap between the banks and the parallel market was N90/$ as at Friday close, between the Investors and Exporters (I&E) rate and banks’ rate was N8.50k/$.
“The spreads between the official markets and the parallel markets of roughly 20% will continue to drive arbitrage bets and speculations on the naira,” said Jimi Ogbobine, head of Consulting at Agusto Consulting, a pan-African credit rating agency.
He said harmonising rates across the markets in a bid to eliminating wide spreads is germane if we must end this speculation on the naira.
The latest data from the CBN showed that the premium between the average interbank/ Bureau De Change (BDC) rates widened to 24.0 per cent from 23.8 per cent in December 2020. Similarly, the premium between the BDC/I&E rates widened to 19.9 per cent from 19.4 per cent in the preceding month.
Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, said, the CBN should focus on efforts to narrow the disparities in official Exchange rates.
The huge gap between CBN and commercial banks rates, he said incentivises round-tripping and creates distortions in the forex market.
According to him, if the banks are closely monitored to the point that forex diversion to the black market is made near impossible and the CBN ensures liquidity of the official windows, the black market rates will be forced down.
In any case, he noted that forex black markets exist all over the world. The ease of transactions and convenience it offers will always result in a higher premium compared to official sources which are most times cumbersome.
“So, at no time is the black market rate expected to be same with official rates. The talk about Exchange rates unification can only be in respect of official sources of forex,” Uwaleke said.
Naira ended the week with a N2 gain as the dollar closed at N510 on Friday against the opening rate of N512/$ on Monday.
Naira fell sharply to N525 per dollar on July 28, 2021, after the Central Bank of Nigeria (CBN) announced its plan to discontinue the sale of dollars to the Bureau De Change (BDC) operators due to foreign exchange arbitrage.
The local currency started firming up on Thursday, the following day after the Nigerian banks chief executives unanimously agreed to support and meet legitimate demand for dollars by the end-users.
The Central Bank of Nigeria on 27 July discontinued FX supply to the BDCs but asked banks to take over the duty of supplying FX to the wider public. The CBN Governor announced the decision during the MPC meeting, relating the action of the BDCs mishandling FX as putting the country’s financial system at risk as they looked for abnormal returns.
“We expect the decision to put further pressure on the Naira in the parallel market as it did in two similar incidents back in 2016 and 2020. While banks should supply dollars to the market, we think logistically (replacing more than 5000 branches of BDCs) and liquidity (system lacks significant FX liquidity) challenges are likely to feed into a weaker Naira.
Moreover, the banking system is required to not provide FX for a range of goods (thanks to the CBN’s list of import controls), hence this would put further pressure on the Naira,” said Mohamed Abu Basha, head of macroeconomy – EFG Hermes.
However, Nigeria may begin to enjoy a stable exchange rate following the expected foreign exchange inflows worth about $6.3 billion will likely give Nigeria’s Central Bank the firepower to defend the local currency.
A breakdown of the inflows indicated that Eurobond issuance worth $USD3-5bn and the $3.3 billion allocations from the International Monetary Fund (IMF)’ Special Drawing Rights (SDRs) on August 23, 2021, will help push up the external reserves.
We do not think the move would create much excitement if it is not followed by clear evidence of a build-up in reserves (the lack of this is clearly weighing on investors’ confidence), as well as higher interest rates (in order to attract portfolio inflows, which remain the key foreseeable source of FX supply, in addition to oil),” Basha said.
“We maintain our view that an FX adjustment is on the way with the CBN likely utilising upcoming FX inflows to help deliver yet another round of Naira adjustment. We think last week’s decision will likely further feed into this adjustment. We are basically eyeing an upcoming USD3-5bn Eurobond issuance – with the gov’t finally receiving the Senate’s nod – as well as a USD3bn injection from the SDR allocation to provide much-needed firepower to help fuel a new adjustment round for the Naira,” said Basha.
Nigerian banks regulator conducts its monetary policy and defends the value of the Naira from a portion of the foreign reserves. The CBN supplied USD3bn to the Bureau De Change (BDCs) between September 2020 and March 2021, accounting for 29 percent of its total FX supply to the market.
The foreign exchange market turnover ended the week with a 31.46 percent increase to $188.26 million on Friday from $143.20 million on the opening trading day on Monday, data compiled by BusinessDay from the FMDQ indicated.
Nigeria’s foreign exchange market recorded a 6.64 percent drop in liquidity as the monthly market turnover declined to $2.81 billion at the end of July 2021 compared with $3.01 billion in the preceding month of June 2021.
The decline in the market turnover was a result of the level of transaction carried out by Investors during the period at the Investors and Exporters (I&E) forex window.