CBN finally devalues naira

14 days after Daily Trust reported that the naira has been devalued but the story was denied by the Central Bank of Nigeria (CBN), the apex bank on Wednesday announced changes to the Nigerian Foreign Exchange (FX) Market.

This has triggered the abolishment of all segments and collapsed into the Investors and Exporters (I&E) Window, thereby confirming what the Daily Trust reported, which it stood by since the report went public and challenged CBN to prove otherwise.

The current move has seen the naira slump to a record low of 29% to N664 per dollar at the close of business in Lagos, according to FMDQ, a local exchange operator, in what is the biggest decline since devaluation in 2016.

The apex bank in the new circular also revealed that applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.

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The CBN in the latest circular signed by the director, financial market, Angela Sere-Ejembi, also disclosed that the operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E Window, calculated to two (2) decimal places.

The circular also announced the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window.

Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DIR/CIR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window.

The CBN proscribed trading limits on oversold FX positions with permission to hedge short positions with OTC futures. Limits on overbought positions shall be zero.

It also re–introduced the order-based two-way quotes, with bid-ask spread of A1. All transactions shall be cleared by a Central Counter Party (CCP).

It further announced the cessation of the RT200 Rebate Scheme and the Naira4Dollar Scheme, with effect from June 30, 2023.

Prior to the latest announcement, the CBN had been auctioning the naira at the SMIS window at over N630 to the dollar.

The CBN earlier on Wednesday directed commercial banks to freely trade the dollar which saw prices rise to N750/$.

The stock market and government bonds surged as investors welcomed the prospect of the latest in a series of reforms by President Bola Tinubu. Reuters news agency said that a web of multiple exchange rates under Emefiele had led to foreign currency shortages and made it difficult for investors to take out money from Africa’s biggest economy.

The agency quoted traders saying the CBN had removed trading restrictions on the official market, which drove the naira to a record low of 750 to the dollar on the official market, down from Tuesday’s low of 477 naira to the dollar.

It also confirmed the fact that this was the first time since 2016 that the naira had recorded a big fall on the official market before the central bank introduced a managed exchange rate in 2017. 

Charlie Robertson, head of macro strategy at FIM Partners, said: “A much needed devaluation which takes the currency from 50% overvalued to about 5-10% (cheaper). This should improve the current account and improve the long term investment climate.

“Tinubu inherited anaemic economic growth, record debt and shrinking oil output but he has promised to put the economy back on track and asked the public to support some painful decisions,” Reuters said.

It said foreign investors had flagged the forex restrictions as one of the biggest impediments to investing in Nigeria, which is Africa’s biggest oil producer.

“What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange and in the next few weeks we should start seeing the naira finding its level,” said Bismarck Rewane, CEO at Financial Derivatives Company.

Liberalization of the naira under a new presidential administration was expected, but the depth of the drop on Wednesday was surprising, said Mark Bohlund, a senior credit research analyst at REDD Intelligence.

“My expectation was for a smaller downward shift now and for the naira to end up closer to 750/USD by the end of the year.

“The devaluation will help the federal government to better balance its books as it is still highly dependent on USD-linked oil revenue while spending is in naira,” Bohlund said.

Professor of Capital Market, Uche Uwalake, in his reaction said, “Let me say upfront that I support the unification of exchange rates which makes for a more transparent forex market.

“But I think that the CBN should implement that in a way that does not cause massive distortions in the general price level.”

He said a sudden free floating of the naira is not advised given that the economic fundamentals required to support a naira float are still very weak, especially in relation to sources of forex.

“It’s rather early to bank on sustainable capital inflows from foreign direct investments due in part to insecurity and the overall unconducive environment of doing business in Nigeria,” he added.

Also speaking on the development, an economist, Dr Muda Yusuf said, “It is important to reiterate that this is not a devaluation policy, it is a normalization of the foreign exchange policy regime and an adjustment of rate to reflect the fundamentals of demand and supply.

“It would be dynamic, and the naira will appreciate or depreciate depending on the fundamentals.

“In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market condition normalizes and moves towards equilibrium, the rate would moderate.”