Nigeria’s forex market has continued to witness fluctuation following its deregulation, announced last week by the Central Bank of Nigeria (CBN) in a bid to create unified exchange rates.
On Monday, the naira performed better at the parallel market, trading at N756 per dollar compared to the N770.38 per dollar it sold at the Import & Investors window. The gap indicates about a 16% decline in the I&E window, where the naira previously traded around N661 per dollar.
The trend, which continued on Tuesday with the parallel market dominated by Bureau de Change operators, underlines an anticlimax tendency for the floated FX market. The naira sustained its N756 per dollar performance at the parallel market while it traded at N780 before reportedly closing around N760 per dollar in the I&E window.
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“I see a situation where the parallel market rate will be cheaper than the I&E rate if adequate liquidity is provided at that window,” Abubakar Mohammed, chief executive officer of Forward Marketing bureau de change Ltd in Lagos who compiles the parallel market data, told Bloomberg.
The situation has been attributed to insufficient dollar liquidity in the banks to mitigate demand pressure at the I&E window.
The CBN Deputy Governor Kingsley Obiora told Bloomberg in an interview in Rabat, Morocco on Monday, that “We are allowing the market itself to set a price.” But he added that the float will be managed.
The central bank announced that it is removing control pegs on the naira as a way to unify all exchange rates into the I&E window. The move, which destabilized the naira, has seen the currency fall more than 30% against the dollar.
However, the decision of President Bola Tinubu to float the naira, which strikes a stark contrast from the approach employed by his predecessor Muhammdu Buhari, has been widely applauded as the spark needed by investors to embrace the Nigerian market.
Obiora said the CBN will announce further measures to loosen foreign exchange controls in the next couple of weeks.
The central bank’s previous control grip on the forex market created several exchange rates, with the parallel market having the highest rates at nearly 60%. Under that forex regime, the naira was repeatedly devalued with a lot of restrictions placed on the dollar. Consequently, there was significantly insufficient supply from the I&E window, forcing Nigerians to rely on the parallel market.
However, the early performance of the naira under ‘the float’ is raising concerns that the I&E window may operate under the shadow of the parallel market. But Obiora said that the CBN is not going to set the currency totally free even now.
“There is no country in the world, even the US, that has a completely free float,” he said, adding that the central bank will continue to pursue a managed float.
According to Obiora, it might be premature to conclude whether the naira’s exchange rate against the dollar has reached its lowest point. He highlighted that the analysis conducted by the International Monetary Fund and international banks accurately indicated that the naira should not be as fragile as the parallel market suggested.
The Deputy Governor expressed his anticipation that the availability of foreign exchange would eventually be restored once the dollar reaches a price that is mutually perceived as “fair” by both buyers and sellers.
But to attain sufficient forex liquidity required to ensure unification of exchange rates, Nigeria needs to build up its depleted foreign reserve. Experts said earnings from crude oil sales following the removal of fuel subsidy, which gulped $10 billion last year, will be enough to provide an adequate supply of foreign currencies in the I&E window – even in the short term.
But before then, the government has been advised to review the forex restriction placed by Buhari on the 43 items. The 43 items, which affect 728 lines of products, are restricted access to the I&E window. An expert said that these lines of businesses are big enough to skew the forex market and make it impossible for unification to happen.