More, Not Fewer Exchange Rates

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Wednesday, April 26, 2017 9:02 AM / FBNQuest Research 

The IMF called for an end to multiple currency practices (MCP) in Nigeria in its recent 2017 Article IV consultation with the FGN.  

Now a former governor of the CBN, Charles Soludo, has made the same call in an economic debate in Lagos on Monday.  

He is not alone: the monetary authorities are alone in that they do not have support outside officialdom.  

However, they are the decision-makers and show no sign of changing tack. Rather, they are extending MCP and moving further away from a unified rate.  

This week’s addition has been the new window for investors and exporters, for which the FMDQ quoted an indicative rate yesterday afternoon of N375 per US dollar. It joins the other windows in operation, including: the CBN’s wholesale transactions; its sales to SMEs; banks’ sales to the retail segment for invisibles at no more than N360; the interbank rate of N306; and sales by the bureaux de change, which are also supplied by the CBN 

We have to add the parallel market, for which the most-tracked website is showing a sell rate of N388. The monetary authorities can argue that the naira has appreciated strongly on this market in the past six weeks since the CBN stepped up its fx interventions, although not to the maximum 5% premium over the official (interbank) rate sought by Soludo. 

They can also argue that official reserves have continued to increase, albeit at a slower pace, despite the sharp rise in fx sales by the CBN. They can point out that demand has fallen short of the offer at some recent interventions. 

We stress that the monetary authorities are not acting in isolation within officialdom. The favoured scenario in the FGN’s Economic Recovery and Growth Plan 2017-2020 has growth at 7.0% at the end of the plan period and a fall in the unemployment rate of five percentage points over the four years. It assumes wide-ranging reforms but is vague on the foreign-exchange regime. There is no mention of unification, let alone of a floating rate 

The offshore portfolio investors are central to the success or failure of the MCP. A sizeable increase in their inflows would transform the market and allow the CBN to take a step back. Currently they are buyers of fx (so that they can exit the market) rather than sellers (as intended by the CBN in the latest window). It is possible that, if they find the repatriation of sales proceeds smoother and faster, and if they decide that MCP are to stay, their thinking could change. 

We still feel, however, that the CBN will have to move towards a unified rate (without a float) because its various windows will not attract the required autonomous inflows. 


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