On Friday, the Central Bank of Nigeria (CBN) ended all multiple foreign exchange (forex) rates in Nigeria and introduced a somewhat single exchange rate regime, apparently in a move to protect the naira from exchange rate depreciation as the COVID-19 continues to take huge toll on Nigeria’s crude oil earnings and foreign reserves.
Some market watchers also say the apex bank’s latest regulatory directive is intended to deal a big blow on rent seekers and speculators who were already stocking up forex purchased on the official CBN rate of N306/$1 so they could sell later for huge profits.
Before this new policy came into effect, the CBN sold the US Dollar at between N306 and N307/$1 at the official market, while the Bureau De Changes sold at between N355-N360/$1 at the street market. The multiple exchange rate has existed since June 2016 even against the advice of market analysts and investors.
The CBN in the circular signed by the Director, Trade and Exchange Department of the CBN, Ozoemena Nnaji, announced that under the new forex regime a dollar would be sold to banks at the exchange rate of N376, while banks would sell to the CBN at N377 per dollar.
Also, the rate the CBN would sell to BDC operators would be at N378 per dollar, while BDCs will sell to end-users at N380 per dollar. The maximum volume of sales for each market is put at $20,000 per BDC.
While some industry watchers have accused the CBN of surreptitiously devaluing the Naira with the latest policy directive, the apex bank has however clarified that what it did was price adjustments and not devaluation.
As the market in the coming days or perhaps weeks will naturally deconstruct the real intentions of the latest CBN policy stance, market analysts have expressed divergent views on the monetary action.
Commenting, a Professor of Finance and Capital Market at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the apex bank’s measure was a bit hasty.
He explained: “I think that in view of the drop in forex demand occasioned by the fall out of the COVID’19, the CBN could have delayed this action, especially coming few days after the CBN governor had assured the nation that no devaluation was in the offing.
“While the upward ‘adjustment’ in exchange rate may increase foreign portfolio investment in the near term and temporary halt capital flight, it rubbishes the 2020 federal and State budgets predicated on N305 to the dollar. This is especially against the backdrop of the fact that the capital provision in the budget has huge dollar component”, the scholar added.
He explained further that the rates’ adjustments “present a major headwind to the country’s capacity to service public debt given the growing proportion of foreign debt, exacerbating in the process the fiscal imbalance.”
“Furthermore, as an import-dependent economy, a major risk will be to inflation. In the months ahead, the Manufacturing and Non-manufacturing Purchasing Managers Index may contract due to high cost of inputs with adverse effect on the already high unemployment rate.
“This will be compounded by the impending deregulation of the downstream sector with NNPC ceasing to be the sole importer, as oil marketers are compelled to access forex at market-determined exchange rates” he noted.
According to him, “even at the current price of N380 to the dollar at the Autonomous Forex market, not a few think the naira is overvalued. By implication, the Exchange rate is likely to rise further.
“The result is that speculators take over the market, politicians in particular see incentive to hold dollar as a store of value and if our experience is anything to go by, even when oil price recovers, the Exchange rate will remain sticky downward. Therefore, this action by the CBN has a signaling content that should not be underestimated.
“My take is that with external reserves of nearly $36 billion enough to finance many months of imports well in excess of the 3 months international threshold, the CBN ought to have continued to defend the value of the naira while it fine-tunes demand management strategies to further contain the pressure” he advocated
Also commenting, Mr. Ayo Teriba, the CEO Economic Associates, called for clarity on the CBN action.
“We need some time to get clarity on this before we can know what to say particularly with the denial by the CBN Governor, Mr. Godwin Emefiele that this it is not devaluation. With time, we will understand the difference between the two” he said.
He, however, noted that the merger will be desirable for the market.
“Moving from N306/$1 will be desirable for the market. This may end up firming the naira. Instead of the market settling at N360/$1, it may end or be settling at between N320 and N330/$1” he said.
Teriba explained further that this would happen because the way the N306/$1 rate was being applied, it rather discouraged supply in many places particularly the remittance window
“So, if the N360 rate applies to the remittances window, there will be an increase through that window and may significantly raise supply to strengthen the Naira. This will boost supply because maintaining N306 was a huge discouragement to the market” he said.
The expert said that in this time of global pandemic, he didn’t expect portfolio funds to come in at the moment as those funds come in good time and leave in bad times while foreign direct investors won’t leave.
According to him, “if the market rate reflects realities, more remittances will come in through bank transfers”
The analysts further noted that another positive side of the situation was the drop in demand for forex, which will mean less pressure on the Naira and of the foreign reserves. He thus admonished Nigerians not to panic.
“It is not only Nigeria is affected by the pandemic. Nearly half of the world may have been locked down. So, where would the demand for forex come from in times of global lock down, when people are not traveling?”, the expert queried.