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Nigeria Exchange Rate: Still the elephant in the room

By on November 4, 2020 0 82 Views

Analysts at the investment banking group, United Capital Plc review the development in the Nigerian foreign exchange market and concluded that the Central Bank may need to devalue the naira again and adjust the interest rate environment to attract forex flow from offshore investors.

Over the last two months, policy reforms in Nigeria have been bold. From the deregulation of the petrol prices to a sweeping adjustment of the electricity sector tariff and of course, the decision of the MPC to slash the MPR from 12.5 percent to 11.5 percent in a bid to stimulate growth following a -6.1 percent contraction in GDP.

Interestingly, FX reserves settled at $35.7 billion at the end of October 2020, broadly unchanged compared to the end of March 2020, at $35.7 billion. Sadly, the exchange rate remains the elephant in the room.

Despite the devaluation of the naira to N379/$-N386/$, the FX market has remained technically inactive for most of the year to date.

Certainly, this is traceable to the initial refusal of the CBN as well as its currently sparse level of intervention at the I&E segment.

Again, the initial resumption of FX sales to BDCS when international travels commenced in Sept-2020 brought a temporary reprieve to the market.

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However, with intervention at $10,000 per BDCs/twice a week (or $20,000) compared to $75,000 previously, the excitement fizzled out almost immediately.

Observably, the CBN’s strategy is to buy time, hoping that oil prices recover. However, the outlook for oil remains blurry, in view of the second wave of Covid-19 in many advanced economies.

As such, market distortion and uncertainty may last longer amid the decision to continue to ration FX rather than allow prices efficiently allocate resources.

To restore normalcy to the currency market, the CBN may need a further adjustment cum a review of the interest rate environment to attract fresh FPI inflows while finding a way to rein-in the galloping inflation rate.

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