July 06, 2020 / 08:55 AM / by FBNQuest Research / Header Image
Credit: Pulse Live Kenya
The CBN informed authorized dealers on Friday that it would not consider fx bids at that day's secondary market intervention sales (SMIS) below a new floor of N380 per US dollar. The previous floor had been N360, and some commentators have rushed to anticipate unification of fx rates. The authorities are moving in that direction, which they confirmed in their letter to the IMF requesting access to the Rapid Financing Instrument (RFI). Further, members of the monetary policy committee have made the same point in their post-meeting personal statements.
These are statements of intent: no more, no less. In IMF-speak, there are "no ex post conditions attached to this emergency loan" (the RFI). So there is not the policy conditionality that the FGN has consistently resisted in declining all standard IMF loans.
The end-users of fx bought at the SMIS are importers, mainly SMEs, so we should view the adjustment of the floor as an important move towards rate unification. The trend is also supported indirectly by the low crude oil price. The main use of the CBN/official rate is the importation of refined petroleum products. Both the FGN (in the 2020 budget) and the NNPC (through its group managing director) insist that fuel subsidies belong to the past.
We sense reluctance on the part of the FGN and the presidency. That said, under deregulation both the corporation and private marketers would be importing products. At some point, Nigeria would be refining much more itself, and importing fewer products. Under this scenario, the argument for the priority rate is greatly weakened.
In the same letter to the Fund, the authorities also indicated that they were moving towards a more "flexible" fx regime that would operate in a "market-determined manner".
Flexibility can be interpreted in several ways. In the current headwinds we do not much expect much change. The CBN has not supplied fx at the investors' and exporters' window (I&E) since late March, resulting in a pipeline of delayed external payments (mostly the repatriation of sales proceeds by foreign portfolio investors).
Regardless of the headwinds, the CBN likes to guide the exchange rate, deploying the ratios set for the banks, other circulars and administrative measures to this end.
Rate unification has consequences for inflation. Before the 'depreciation' engineered by the CBN on 20 March, the differential between the official and I&E rates was roughly N60. It has since narrowed to around N25. We would witness a small pick-up in inflation at worst and should ask how far importers would pass their higher costs onto consumers.