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Forex round-tripping reignited as parallel, official rates disparity widens

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Unless the Central Bank of Nigeria (CBN) takes proactive action in narrowing the gap between the official and parallel foreign exchange rates, dealers face the temptation of going back to the dark days of round tripping, experts have warned. Bismarck Rewane, chief executive of Financial Derivatives, in his monthly Economic News and Views said the gap between official and parallel rates rose from 2.6 percent in January to 3.39 percent in February.

 

Analysts are concerned that if the disparity continues to grow without the CBN nipping it in the bud, dealers in the market may be tempted to use the widening margin to engage in round tripping.Last year, the increase in margin gave room for speculations that saw the naira become very volatile. Rewane recalled that Year-on-Year spread have narrowed by 87.41 percent to 3.29 from 26.15 percent in 2009.

 

He believes that though the spread is widening gradually this year, it is much better than the previous years. To him, the spread today is “indicating a relatively more stable forex macro-economy compared to what obtained the previous year”. The situation is even more precarious following increased demands since the beginning of the year. For instance, Rewane said forex demand surged by seven percent to approximately $1.2 billion in February.

 

Ordinarily, a surge in demand or supply of foreign exchange is interpreted as an increase in economic activities. But the reverse was the case as the long absence of President Umaru Yar’Adua and shortage of petroleum products have slowed down productivity.

 

In the absence of increased activity in the economy, analysts say capital flight will set in. This is viewed by many as sapping the economy of the country.During the period under review, reports by the Financial Market Dealers Association (FMDA) said the central bank, through its trade and exchange department, responded swiftly to the market demand in the month, offering more volume to neutralize the gap created in the previous month.

 

The month recorded the sale of $1.874 billion against the $1.52 billion sold in January. The figure was $352.00 million higher than the volume sold in January 2010, and $1.036 billion higher than the figure for December 2009. The observed increase in the WDAS transactions was still being driven by increase in business activities in the downstream oil sector and importation of raw materials.

 

FMDA said with a significant supply gap created as a result of CBN’s inability to meet the market demand for foreign exchange in the last two auctions in January, rates in the inter-bank market responded sharply in the first week of trading in February as the Naira depreciated by 17 kobo, in the Wholesale Dutch Auction System (WDAS) and N1.02, in the inter-bank market. What would have been a distortion was tamed early as CBN rose to the challenge, surpassed the market demand at the mid-month auctions to calm the market. The demand in the month was $1.838 billion against $1.70 billion offered and $1.624 billion sold by CBN.

 

From an opening figure of N148.00/$ and N149.00/$ for bid and offer respectively at the first business day of the WDAS, the rate closed the month at N147.61/$ and N148.61/$ against the closing rate of N147.83/$ and N148.83/$ in January 2010. 

(Source: BusinessDay)

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