Unification of Exchange Rate: A Step Closer?

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Wednesday, May 26, 2021 / 04:14 PM /  by CSL Research / Header Image Credit: Decentralize Africa

 

On 14 May 2021, the Central Bank of Nigeria removed the previous exchange rate of N379//US$ from its portal while updating it to a new version. Yesterday, the updated platform confirmed that the CBN has now adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX), which stood at N410.25/US$ as of the close of business yesterday. This development formalizes the use of NAFEX as the official exchange rate of Nigeria.

 

Recall the 2016 economic crunch that significantly hampered the flow of foreign exchange earnings had set the tone for creating multiple exchange rate windows in 2017 as part of the CBN's efforts to prioritize FX allocation to some sectors amid FX scarcity. While the policy has received widespread criticism, the CBN over the years had insisted that it was in the best interest of Nigerians to ration scarce FX among priority sectors in the economy.

 

Following the recent strain in FX inflows as the world grapples with Coronavirus, the need to provide stability and assurance in the Nigerian FX space has become pertinent. Foreign portfolio investors have had difficulty repatriating their funds in the last sixteen(16) months, making FX clarity top among factors that would drive renewed interest from FPIs. This recent decision is a move towards a unified exchange rate regime.

 

Interestingly, in March, the CBN had debunked rumours of a currency devaluation following the Minister of Finance, Zainab Ahmed's revelation that the government had adopted NAFEX for government transactions. Mr Emefiele reiterated that the country still operates a managed float exchange rate regime. The official rate, which has been fixed at N379 since August 2020 (previously at N360), will now follow the I&E rate and will therefore be subject to market fluctuations. While the move would help simplify Nigeria's intricate FX regime and provide a slight boost to the government's oil revenue, this is likely to amplify inflationary pressures. The official rate is used to import items like fuel and electricity.

 

In our view, the step towards FX rates convergence is positive for further funding from multilateral bodies, as both the World Bank and the IMF have always pushed for a unified and flexible rate to avoid arbitrage opportunities in the FX market. However, we note that CBN still has a significant FX demand backlog yet to be cleared and will likely continue to use the FX reserves to manage rates. As such, the CBN will likely devalue the I&E rate by c.5.0% -7.0% by year-end to unlock FX liquidity, attract new FPI flows and curb the current account imbalances, which is projected to reach US$10.80bn (2.1% of the GDP) in 2021.


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 Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

 

 

 

 

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