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As CBN begins pre-emptive move towards exchange rate convergence

The Central Bank of Nigeria (CBN) on Monday weakened the naira marginally; selling the dollar at N307 for the first time on the official interbank…

The Central Bank of Nigeria (CBN) on Monday weakened the naira marginally; selling the dollar at N307 for the first time on the official interbank market in what traders say could signal a gradual move to merge its multiple exchange rates.

The bank has sold $500,000 almost on daily basis on the official spot market since creating several exchange rates to alleviate dollar shortages.

For years, narrowing the wide gap between the various rates on the foreign exchange (FX) market has been a source of concern to the CBN. In fact, the yawning gap between the various FX market segments created an arbitrage window for a lot of individuals as well as Nigerian banks to speculate on FX and round-trip in order to boost their earnings. 

Previous findings have shown that one of the most attractive businesses among some Nigerians was to get FX for personal travel allowance (PTA) from the interbank market and sell same on the parallel market, thereby taking advantage of the wide margin.

The CBN had sold the currency at rates of between N305 and N306 for months before Monday’s move.” It’s possible the CBN is working towards a gradual convergence of rates, several  traders told Daily Trust.

Multiple foreign exchange rates will disappear in the long term, if the CBN has its way, CBN Governor Godwin Emefiele hinted in October.

Emefiele who spoke of a uniform system in the long term at the third All Civil Society National Economic Summit on Sustainable Economic Policy Strategy in the Face of Economic Progression in Abuja, said the bank allowed the current multiple exchange rate regime to encourage Small and Medium Enterprises (SMEs).

 “Before now it was difficult for those who were involved in SMEs to get foreign exchange from banks, but the CBN realised that it was these SMEs that were needed to grow the economy and gave the directive to commercial banks to issue foreign exchange to SMEs at cheaper rates so that their businesses can still remain profitable,” a representative and the Special Adviser to the CBN Governor, Mr Emmanuel Ukeje, told reporters.

The CBN governor said: “We know that one exchange rate is ideal and in the longer term, we are talking about convergence of exchange rates, but for now, we need to actually encourage some of those who particularly need this foreign exchange to produce goods and create jobs.”

Nigeria has operated  what seems likes just two exchange rates; one is the official central bank rate of N305 per dollar, while the other is between N360 to N365 at the interbank and parallel market.

The move for single exchange rate effectively started when Monetary policy officials unified some of their multiple exchange rates as they directed currency dealers to quote naira levels used in actual trades for August.

The move, according to Bloomberg, is “to entice back bond investors who fled in 2014 and 2015 as oil prices collapsed and the central bank tightened capital controls”.

Since the CBN introduced the investors window known as Nafex in April, banks have been trading but were not allowed to publish their trades.

In August, however, the FMDQ OTC Securities Exchange, asked banks to start quoting Nafex rates, effectively merging that market with the main interbank one.

For foreign investors not already using Nafex, it made naira assets a lot cheaper. And even for those that were, it boosted transparency and allowed them to see live quotes on their screens for the first time.

“Foreign currency trading volumes have already picked up and analysts are more and more inclined to recommend local-currency debt.”

Rick Harrell, an analyst in Boston at Loomis Sayles & Co., which manages $258 billion of assets and recently started investing in naira bonds again also told the news agency headquartered in New York that “Investors would love it if Nigeria moved to a single rate. But the central bank is constrained because of the need to supply cheaper dollars to fuel importers.”

“It’s such a sensitive matter, especially with the economy still weak,” he said. “It’s still not ideal. But by Nigeria’s standards, this is good enough.”

Cowan believes that “despite the greater availability of foreign exchange, there are still major constraints”. He says “there may have to be further naira weakness to fully kick-start the foreign-exchange market and the economy.”

The 2018 budget is premised on the N305 per dollar rate, which shows the government is willing to go all the way through 2018 with the CBN official rate.

According to the Chief Executive of Financial Derivative, Bismark Rewani: “The question of the exchange rate assumption was at best curious and at worst unsatisfactory. We have a situation where nominal exchange rate is at N305 and the effective exchange rate is at N360. 

“The question is who gets it at N305 and what do they use it for? Why do we need to maintain price discriminatory monopoly when in fact we are transitioning to a perfect market?” 

Daniel Ukhuoria, a development researcher said: “The action of the CBN was long over due. With the pressure on the naira, it makes sense that they review upwards.After all only few  people gets the dollars at the  N305 window.

“For the government not to lose more dollars, it is important it uses this window to reduce the pressure on its reserve.I think it is a strategy for a future adjustment. It is a smart move but the difference is still very marginal.”

Addressing the concern around the budget estimate, he said even though it is pegged at N305, what should be of more concern to the National Assembly is the benchmark for oil price, which the assembly has moved up by $2. 

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