Nairametrics| Yesterday, Reuters reported that Central Bank of Nigeria sold about $6.5 million of Forex to the interbank market in a bid to inject much-needed liquidity in the market. According to some sources, the black-market rates immediately dropped to N510/$1. Nairametrics daily tracker puts the price at about N516/N511 Buy/Sell.
It appears from all indications that the exchange rate at the parallel market might be headed south, at least for now. According to some of the BDC operators we spoke to, most speculators started exiting their positions by Wednesday afternoon as details of the new policy sunk in and after news about dollar sale by the CBN helped change permutations. Although there is still a lot of skepticism about the true intentions of the CBN, no one seems ready to be on the other side of the bet assuming it succeeds.
As is typically the case with past CBN policies, black market rates drop in the first few days before it starts to worsen again. For example, the exchange rate strengthened from about N370 on June 15, when the new flexible exchange rate policy was announced, to N350/$1 48 hours later. However, by June 25th it had breached the N370 ceiling before climbing up again to N385 by June 25th. It has been downhill since then.
Will rates continue to drop?
Several factors could determine the direction of the exchange rate in the coming days.
First, will be the ability of the CBN to continue to sustain supply. If sales to banks are sustained as promised then demand pressures will likely reduce, thus affecting price. But that alone can’t solve the rate disparity concerns of the CBN.
Which brings us to the second factor. Some operators we spoke to believe that a gradual depreciation in price or to use a more familiar term, devaluation of the exchange rate, could also help narrow the disparity until we hit a “comfortable premium.”
We believe that a comfortable premium could be achieved when the parallel market rate starts to drop incessantly while the official rate rises, such that the difference between the two is no less than 10%. Currently, the black-market rate trades at a 60% premium to official rate. The BDCs are still expected to buy about $8k weekly from foreign remittances at N375 and sell at about N381. These prices must converge at some point, if we want the black-market rates to fall.
Presently, banks are buying at N305 from the CBN and can sell within a 20% premium, an obvious devaluation. It is expected that the CBN will continue to move that price point as demand from banks increase rising to a level that is closer to the parallel market rate. Once that happens then we are on the path to a float.
A more ominous factor remains the activities of commercial banks. If they play by the book (which they hardly do) and resist the temptation to roundtrip, then we could see a lot of the demand on the streets dropping drastically. We believe, some crooked bank executives are gauging the seriousness of the CBN in implementing the provisions of this policy, especially with regards to sanctions. Once they observe any slack, they will roundtrip by lying to customers that they do not have forex to sell. On a flip side, the CBN has partly succeeded in getting banks to be more transparent about who they sell Forex, an arguable indication that they at least have an idea of how banks can be monitored for compliance.
We believe that the CBN is playing a delicate game. The first part of the plan in our view is to get reduce the rate disparity between the black and official market to that “comfortable premium”. Once that is achieved they will float the naira. Floating that naira without testing its true market value would obliviously be irresponsible considering the wider implications on the economy. The CBN was certainly not going to do it at rate of N520/$1. It must be on its own terms and as a big supplier, they can help put the exchange rate on a path to rate discovery when they pump in a fair share of supply to both the retail and wholesale end of the market. This is what they are doing now. Whether it works or not is yours to imagine.