Naira falls after CBN adopts flexible FX

Naira yesterday depreciated significantly in value against the dollar by N4 or 1.16 percent at the parallel market after the Central Bank of Nigeria (CBN) adopted flexible exchange rate.

It closed at N350 yesterday against the dollar compared with N346/$ the previous day at the parallel market. The naira also weakened against the greenback at the autonomous market by N2 or 0.58 percent to close at N345/$ yesterday from N343/$ the previous day.

After the MPC meeting on Tuesday, the monetary policy rate (MPR) was retained at 12 percent with the asymmetric corridor around the MPR also maintained at +2.0 percent/-5.0 percent. Also, the cash reserve ratio (CRR) was unchanged at 22.5 percent. The liquidity ratio of the banking sector was also left unchanged at 30 percent.

Aminu Gwadabe, acting national president, Association of Bureau De Change Operators of Nigeria (ABCON), said, “we appreciate the position of the CBN in embracing flexible exchange rate,” saying it would bring transparency, increase availability and help achieve rate conversion.

Kunle Ezun of treasury research, Ecobank Nigeria, said in an email note to BusinessDay that the flexible interbank exchange rate was likely to be above the current rate of $1:N197, at which the CBN has been selling dollars to banks. We think this rate is initially likely to be around the current parallel market rate of N340/$, as pent-up demand for dollar was released onto the market.

Over time, the move is likely to increase the supply of dollar liquidity to the interbank market, as remitters and exporters are likely to be more willing to sell dollars at the interbank rate.

“Similarly, we believe that investors who have been sitting on the sidelines for fear of not being able to get dollar out of the economy will now be more willing to commit. With this increased supply, we expect that the flexible interbank market rate will gradually appreciate towards N310-N320/$.”

He said greater flexibility would be positive for the economy, as it would improve access to foreign exchange (albeit it at a higher rate) for firms that have been struggling to do buy hard currency. “The inflationary impact, we believe, will be fairly limited because many importers who were accessing dollars were already doing so on the inefficient parallel market,” he said.