Evolution Not Revolution in FX Thinking


Wednesday, August 12, 2020 / 08:48 AM / By FBNQuest Research / Header Image Credit: LTV


Our simple chart is almost symmetrical and neatly conveys the recurring challenges at the heart of exchange-rate policy. Between June 2017 and February 2020 fx was freely available. The differential between the official/interbank rate and that at the bureaux de change was constant. Up to May 2017 and since March this year, fx has been in short supply and the spread considerably wider. The turbulence either side of the period of calm reflects pressure on the balance-of-payments and reserves. As the sequence of events has repeated itself so we are guilty of the same in that our analysis is consistent.


Calm returned in June 2017 because of the return of foreign portfolio investors (FPIs) in large numbers. The oil price did not reach US$70/b until March 2018.


The CBN and FGN now find themselves in dangerous territory for two reasons. While the oil price has settled above US$40/b for two months, Nigeria must make large production cuts in line with OPEC quotas. Second, a new influx of FPIs would be a surprise, given that existing investors have been waiting since March for the repatriation of earlier sale proceeds.


The FGN is in talks with the World Bank over budget deficit financing of US$1.5bn. It could well be that the Bank is pushing for fx reform. The CBN has been moving towards unification of rates since March but at its own pace.


If the Bank was to disburse, the CBN might briefly supply the investors' and exporters' (I&E) window to reduce the backlog of payments. Our hunch is that the I&E rate will be around N410 at end-year, noting that the CBN has shown some flexibility in its market intervention sales for retail.


Average exchange rates (NGN per USD)

Proshare Nigeria Pvt. Ltd.


Sources: CBN; FBNQuest Capital Research


Rather than a chase after said fair value, we see small rate adjustments and administrative measures by the CBN. This is our conclusion based upon analysis of the institution, its policy statements and high-profile speeches.

Proshare Nigeria Pvt. Ltd.


Related News

  1. No Big Change in FX Policy
  2. NOVA Economic Insights August 2020: Social Distancing Persists at the IEW and BDC Segments
  3. Gross Official Reserves Declined by US$320m in July 2020 to US35.88bn
  4. Resilience of Workers' Remittances
  5. Implications of CBN's Exchange Rate Unification - PFI Capital Limited
  6. Nigeria Agrees to Pursue Exchange Rate Unification
  7. Gross Official Reserves Declined by US$400m in June 2020 to US36.20bn
  8. A Step Towards FX Rate Unification; FX Bids New Floor Now N380
  9. Nigeria's Naira Slides on Official Market on Plan to Align Exchange Rates
  10. FMDQ Exchange Set to Engage Market Stakeholders on Combating Currency Exchange Volatility
  11. Nigeria's Gross Official Reserves Recovered By US$3.07bn in May 2020 to US$36.60bn
  12. Manufacturing: FX Shortage Starting to Bite
  13. Nigeria Foreign Exchange - Naira: The Price of Nigeria's Oil Fortune
  14. Gross Official Reserves Declined By US$1.64bn In April 2020 to US$33.52bn

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
Related News