After years of fluctuating FX policies, characterized by multiple exchange rates, the Central Bank of Nigeria (CBN) has decided to adopt the Nigerian autonomous foreign exchange (NAFEX) rate — weakening the naira by 8 percent to N410.25/$1
The instability in the Nigerian Forex market has been fingered as one of the biggest hurdles for investors in Nigeria. The African largest economy has repeatedly made adjustments that failed to settle the disparity in exchange rates.
Earlier, Reuters reported that there has been an adjustment to the official CBN’s N379/$1 rate. The report was supported by the central bank’s move to remove the rate from its website.
Nigeria has multiple exchange rate windows, including the I&E (NAFEX) window, which trades forex between exporters, investors, and buyers; the SMEIS window, which sells forex to importers; and the BDC window, which sells forex to retailers.
The exchange rate was adjusted last year, after an official devaluation in March, in an attempt to align multiple quoted currency rates. But the naira has continued to weaken this year, mirroring weaknesses on the derivatives market.
Following the plunge in crude oil prices, the West African country’s economy succumbed to shocks emanating from dwindled revenue generation, worsening its foreign exchange crisis.
The central bank of Nigeria uses a multiple exchange rate mechanism to keep the naira under control. However, the economy has been beset by dollar shortages since the COVID-19-induced oil price drop cut government income and undermined the naira.
The situation, which has thrown businesses into disarray, needed a permanent fix as advocated by experts.
The International Monetary Fund (IMF) said Nigeria’s current situation of multiple exchange rates and non-transparent rules for foreign exchange allocation creates uncertainties for the private sector. Unifying the various rates into one market-clearing rate would establish policy credibility.
“Sustained premiums in the parallel market and unmet foreign exchange demand indicate the need for further adjustment in the exchange rate to reduce the gap between supply and demand. An appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sector-led recovery,” the IMF said.
The central bank has been reluctant to make additional exchange rate adjustments, saying that further exchange rate depreciation would stoke rising inflation.
The IMF estimates that the naira was overvalued by 18½ percent, urging the federal government to once again devalue the naira to reflect the current economic realities of Nigeria.
The IMF had recommended that greater adjustment in the exchange rate should be allowed to facilitate CA adjustment (mostly through import compression in the very near term due to limited non-oil exports), eliminate the parallel market premium, remove and prevent further build-up of the FX backlog, and increase non-CBN participation in the I&E market window.
It warned the CBN to step back from its role of main FX intermediator in the country, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.
The new rate, which has been updated on the apex bank’s website, means that Nigeria’s official exchange rate will be determined by NAFEX rate or the importer and exporter (I&E) FX window.