Naira appreciates after Buhari’s consent to flexible FX

The naira yesterday gained over the dollar following the approval by President Muhammadu Buhari of flexible exchange rate market.

Naira firmed by N7.50k against the dollar as it closed at N368.50k yesterday, representing 1.99 percent compared with N376/$ the previous day at the parallel market.

The local currency also strengthened at the autonomous market by N8, closing at the N365 against the greenback yesterday, which was 2.14 percent gain from N373/$ closed the previous day, BusinessDay findings show. At the official interbank clearing rate, the naira closed stable at N197/$.

Buhari on Wednesday gave his approval for the Central Bank of Nigeria (CBN) to begin the implementation of flexible exchange rate system, June 2 after receiving a memo from the monetary authorities.

However, details of Nigeria’s flexible currency model will be ready in a “short while,” Phillips Oduoza, CEO, United Bank for Africa (UBA), said on Thursday after the Bankers Committee meeting with central bank officials.

Addressing journalists after the meeting, he said the central bank had received lots of input from stakeholders, which were being studied with a view to creating a robust flexible exchange rate model.

The central bank announced last month plans to abandon the naira’s 15-month peg to the dollar, which has overvalued the Nigerian currency, harmed investments and caused the economy to contract.

However, the bank has yet to come up with details on how the new policy would work, spooking foreign investors, long worried about getting caught in the middle of a currency devaluation.

Razia Khan, chief economist, Africa, Standard Chartered Bank, said in a report, “it is not yet clear how much FX flexibility the authorities plan to adopt. Having gone to great lengths to avoid official currency depreciation since February 2015, it appears unlikely that the authorities will favour blanket FX liberalisation moves now.”

However, Nigeria’s FX reserves are under pressure, even more so given recent reports of oil output falling below 1.4 million barrels per day. Maintaining the status quo, with FX reserves under pressure, and import cover at risk of falling below four months, is unlikely to be favoured. Moreover, financing availability is likely to be strongly influenced by perceptions of Nigeria’s external liquidity strength. The absence of FX flexibility is a key constraint on increasing external borrowing.