The foreign exchange pressure continued on Tuesday morning as the intraday trading shows Naira weakening further by 0.23 percent to N398.42k as against N397.50k quoted on Monday at the Investors and Exporters (I&E) forex window.
The depreciation in the value of Naira was as a result of dollar shortages. Daily foreign exchange turnover declined by 40.32 percent to $57.78 million on Monday from $96.82 million on Friday, data from FMDQ indicated.
Naira closed at N398.50k per dollar on Monday, which was 0.50 lower than N396.17k closed on Friday. Foreign exchange dealers maintained bids at between N385.00k and N402.00k.
The local currency steadied at N480 and N478 per dollar on the black market and Bureau De Change (BDC) segment of the FX market.
Over 5,000 BDCs across the country are expected to receive dollar disbursement from the Central Bank of Nigeria (CBN) on Tuesday.
The International Monetary Fund (IMF) said on Monday that a more transparent and market-based exchange rate policy is imperative to instil confidence.
IMF Staff recommends establishing a market-clearing unified exchange rate with the near-term focus on allowing greater flexibility and removing the backlog of requests for foreign exchange.
According to the Washington based Fund, Exchange rate flexibility may have short-term negative impacts, particularly on inflation, which should be mitigated. Staff’s estimates suggest that a 10 percent devaluation could push the inflation rate up by up to 2.5 percentage points, but the impact could be less if the parallel market rate is already reflected in the prices of imported goods. Experience from other counties that have undergone exchange rate adjustment generally shows less pass-through and often a more transient impact on inflation.
Some targeted support is likely needed to minimize the impact on the poor. The corporate sector and possibly the banking sector could also face significant impact given that a third of banking sector loans are denominated in FX. Strict and pro-active enforcement of existing prudential measures to limit FX loans to only those with FX earnings should limit this impact.
IMF Staff recommended a multi-step approach to exchange rate unification and flexibility. While such an approach carries some implementation and credibility risks, it seems appropriate given the need for monetary policy to support the economy and steps needed to move from the current system to a well-functioning exchange rate system. At the same time, it will be crucial to follow through with reforms without delays and not to backtrack, to ensure maximum effect.
Likewise, clear and timely communications of the FX strategy to the private sector are also important to instil confidence.
On the Immediate steps. Greater adjustment in the exchange rate should be allowed to facilitate Current Account (CA) adjustment (mostly through import compression in the very near term due to limited non-oil exports), eliminate the parallel market premium, remove and prevent further build-up of the FX backlog, and increase non-CBN participation in the I&E market window. To prevent excessive overshooting, the authorities should be prepared to increase interest rates if needed. Higher interest rates will also be needed if inflation accelerates.
On near-term steps, IMF said all exchange rates should be collapsed into one well-functioning market exchange rate with the CBN conducting FX auctions through a pre-announced schedule following the immediate steps. This should be accompanied by gradual removal of import restrictions and export repatriation requirements and the phasing out of CFMs. The process of the phasing out of CFMs should be state-dependent and commence with the stabilization of the external position while paying due regard to the reserve adequacy and orderly macroeconomic adjustment——in line with the IMF’s Institutional View on Liberalization and Management of Capital Flows.
On medium-term steps, the Fund said the CBN should step back from its role of main FX intermediator in the country, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.
However, Nigerian authorities did not agree with the need for an additional exchange rate adjustment.
They explained that the major burden of macroeconomic adjustment does not need to be borne by the exchange rate, as current pressures are not related to the exchange rate per se but rather reflective of global developments. In their view, investors exited most emerging markets at the onset of the pandemic and will only return when the public health crisis has waned, and global economic activity has picked up.
The authorities, furthermore, emphasized that Nigeria’s stable exchange rate has contributed significantly to price stability, one of the most enduring objectives of macroeconomic policy.
Allowing further depreciation would add to rising inflation. They also emphasized that they are addressing the FX backlog and noted that turnover in the I&E window is on an upward trend.
