Despite the Central Bank of Nigeria yet to roll out the details of the new flexible exchange rate policy, which is a monetary system that allows the exchange rate to be determined by supply and demand, the nation’s currency naira has switched to N285 to a dollar at the interbank market, The Guardian reports.
The policy, which throws naira into open market, paves way for one to walk into the bank and ask to buy forex at the market rate, hence, putting pressure on black market and Bureau de Change operators.
The new policy also means that banks and Bureau De Change (BDC) operators will have to source forex autonomously and sell according to market dynamics.
The interbank rate had run nearly at par with the official at N199 per dollar and N197 per dollar respectively before the pronouncements on the new foreign exchange measure. The new rate represents about 43.2% increase from N199 to the dollar it previously traded, which according to analysts suggests that the market is gradually adjusting itself to the new direction, although the details are yet to be unfolded.
However, a look on the apex bank official website, www.cbn.gov.ng has shown the naira is still pegged at N197. Meanwhile, President Muhammadu Buhari has given the CBN the go-ahead to introduce flexibility in the naira exchange rate.
Speaking in an interview on Nigeria Television Authority (NTA), Garba Shehu, the senior special assistant on media and publicity to President Buhari said: “The president is opposed to devaluing the naira, he has said so repeatedly.
“He has given them leeway to introduce what he has called ‘flexibility in managing’ the currency’s value.” Buhari said at the weekend that he supported a stable currency, though he would keep “a close look at how recent measures affect the naira and the economy.”
Recently, Kachikwu, while explaining the increase in petroleum pump price, said that the figure was arrived at by the assumption of N285 per dollar, which immediately puts forex traders in speculation that the government now believes that that should be the right price of the naira.
The interbank rate had run nearly at par with the official at N199 per dollar and N197 per dollar respectively before the pronouncements on the new foreign exchange measure.
The new rate represents about 43.2 per cent increase from N199 to the dollar it previously traded, which according to analysts suggests that the market is gradually adjusting itself to the new direction, although the details are yet to be unfolded.
Meanwhile, financial analysts have commended the new policy measure of CBN and expressed optimism that it would go a long way in reducing volatility in the foreign exchange market, adding that it is better than the peg on the naira, but differed on devaluation.
The CBN Governor, Godwin Emefiele, had last week, said that while adopting the new policy, the apex bank would only open a small window for critical transactions, which relate to the import of plants and equipment to produce goods for which their raw materials are almost 100 per cent available locally.
“We will support such attempts by people to set up factories, foreign direct investments or even local direct investment. So, if they want to make these importations, we will look for opportunities to make incentives available for them to stimulate growth. This is basically for raw materials that have minimal foreign content, not those that are wholly imported,” he said.
By the flexible exchange rate system, the peg on the currency value is removed and a two-way quote system is automatically introduced, with one being an intervention for critical activities as deemed by the regulator, while the other comes with competition through the sourcing of the forex from autonomous sources.
But contrary to popular views among some financial experts, the Research Analyst at FXTM, a global foreign exchange trading brand, Lukman Otunuga, said Nigeria stands to lose more, especially with the majority of poor masses, if they had opted for full devaluation.
He admitted that the country’s economy is depressed, but would have been worse with its “import-dependent nature and crude oil price crisis still hanging in the corner.
“The IMF has been urging Nigeria to devalue and it is natural in this economic state to get some relief. But the problem is that the currency is already very weak. N285 per dollar on Friday at the interbank/parallel and N350 at the black market and you can see that devaluation would only hurt the country the more.”
Meanwhile, the Association of Bureau De Change Operators of Nigeria (ABCON) said the latest policy direction is not only laudable, but a necessity to tame the drifting exchange rate regime, which has been creating difficulties for the currency’s parity.
ABCON’s Acting President, Alhaji Aminu Gwadabe, told The Guardian that notwithstanding the short supply of foreign exchange, the market is on its way to perfection, as the previous regime encouraged arbitrage and unequal opportunities, especially in favour of the banks.
He noted that what is left to kick-start the new regime of foreign exchange market is for the CBN to unveil the modalities and transparently, without delay, as continued delay will only lead to harmful speculations.
According to the Executive Director, Corporate Finance, BGL Capital Limited, Femi Ademola, while the details of the measures are being anticipated by the market, the effects of the new policy are gradually trickling in, as rates are tending towards N285 at the interbank market already.
Speaking on the new policy, he noted that it truly means a deregulated system, with only marginal interventions, while rates are determined by market dynamics.
He said that CBN in this case, would only act as a supporter with its marginal window to dowse the market, while parallel market fizzles out, because both banks and BDCs operate in the same autonomous market.
The CBN chief had last week ruled out the possibility of restoring funding to the BDC segment, especially at this time of dwindled forex earnings.
“BDCs actually are part of the foreign exchange, but I have not by any means said that they are going to be restored to the official foreign exchange window. They will continue to operate at the autonomous market,” he said.
The Head of Investment Research at Afrinvest Limited, Ayodeji Eboh, said the indication of a flexible exchange rate regime, although the details at the moment are anticipated, would strengthen performance of the equities market and is a step in the right direction.
“We believe FPIs and FDIs which have been staying on the side line would find their way into the system on the back of foreign investor confidence receiving a boost as the interbank market is reinstated as the official platform for market determined exchange rate.
“More importantly, it will also create the required liquidity for oil marketers to source forex at the guided rate of N285 per dollar assumed by the petroleum pricing template,” he said.
The Chief Executive Officer of Time Economics, Dr. Ogho Okiti, said the policy “provides the strongest signal yet that the bank will develop some flexible measures for the exchange rate market,” he said, adding that it would further ensure the free flow of forex to the productive sectors.
While reading out the communiqué of the monetary policy meeting, Emefiele noted that given the imperative for growth, the CBN had been given the mandate to work out the modalities for achieving the desired flexibility that was in the overall interest of the Nigerian economy and when the implementation of the new framework would begin.
“In an economy characterised by high import- dependence, the shortage of foreign exchange provided some basis for price increases as currently being experienced. The committee noted that the economy needed to aggressively earn and build up its stock of foreign reserves in order to avoid distortions when faced with severe shocks.
“The current inflation trend, being largely a product of structural rigidities and inadequate foreign exchange earnings would continue to be closely monitored, and in coordination with fiscal policy, with a view to addressing the underlying drivers of the upward price movements,” he said.