Wednesday, July 08, 2020 / 10:12 AM / by FDC
Ltd / Header Image Credit: Punch
In the past few weeks, the monetary and fiscal
authorities have made policy pronouncements to the effect that Nigeria is
likely to achieve a unified exchange rate as against the current practice of
multiple exchange rates. It is widely believed that the sudden conversion of
the monetary policy making bodies to accept the unification is at the instance
and persuasion of the multilateral bodies especially the IMF and the World
Bank.
This is good news for the markets and investor
sentiment. At a time of dwindling revenue, the Nigerian economy needs all the
help it can get. Exchange rate unification around the investor and exporter
window (NAFEX rate) will lead to an adjustment of the official rate to N386,
while the parallel market is expected to gravitate towards that rate. Most
forex transactions are conducted at the IEFX window, with the CBN as the major
supplier. It also brings the naira closer to its fair value. Using the
purchasing power parity as a rough estimate this brings the exchange rate
around N400/$. This move is expected to reduce arbitrage activities and
speculative attacks against the naira.
Implications
So far in Q2, the average daily turnover at the IEFX
window is $43.22mn, compared to $345.01mn in Q1 which is indicative of the
dearth of forex. Different figures have been bandied about on the volume of the
forex demand backlog. Irrespective of what the actual demand is, the fact still
remains that there are shortages. Indeed one would ask where the demand is
emanating from especially as schools are closed (so international tuition to an
extent has been put on hold) and international travel remains suspended. But
what of the investors that are stuck with naira cash and want to repatriate
their funds?
The antsy over whether the naira is trading at its
fair value or if the external reserves level is sufficient to meet outstanding
obligations has heightened uncertainty in the markets. The CBN's announcement
that the reserves level is "comfortable to meet obligations" should smooth many
ruffled feathers.
Also,
now that there is more clarity on the CBN's exchange rate stance, it should
boost investor confidence. However, a note of caution- there are outstanding
obligations and when nilled off puts the net external reserves level below
$20bn (about 5 months of import cover).
In
addition, Nigeria still faces a serious problem with respect to its sources of
forex which remain constrained. Oil prices will remain low, probably below
$50pb for the rest of 2020. Coupled with reduced oil production, forex revenue
from oil receipts will be limited. Another source of forex, Diaspora
remittances, will decline sharply due to the rising rate of unemployment and
contraction in the global economy. The Minister of Finance has said no Eurobond
issue this year. However the drawdown on multilateral loans from the likes of
the IMF and World Bank should provide some buffer.
Increased FAAC funds
State
governments will benefit from an exchange rate unification around the NAFEX as
they will be receiving more naira. This should offset the impact of reduced oil
sales and tax revenue due to the contraction in economic and business activities.
Also, the fact that the government has stopped the payment of gasoline
subsidies should ease the fiscal burden.
Why the Naira may not Crash
There are certain assumptions we have based our projections on. These are as follows:
Based
on the above, the unification of exchange rates is expected to lead to a
depreciation of 9.72% of the official rate towards the IEFX rate. This will in
turn mop up about 4.78% of liquidity (N1.35trn). The total naira liquidity
reduction of 14.5% is expected to lead to an appreciation of the parallel
market rate towards the range of N400- N420.
Related News
Signup with Facebook
Signup with Twitter
