It’s officially seven days since Nigeria began a free float of its exchange rate. The new interbank foreign market ushered in by the Central Bank Governor, Godwin Emefiele is expected to provide some relief for an economy that has been starved of foreign investments in the wake of the imposition of capital controls that has contributed in no small measure to an imminent recession.
As Nigerians wait expectantly to see the impact of this policy on their standard of living, we have on our own compiled a few pointers that we believe could decide the trajectory of this new policy.
41 items still an issue – When Godwin Emefiele announced the new policy he made sure he informed everyone that the 41 items banned from assessing the forex window remained banned. It was seen as the only downside of a policy that basically exceeded everyone’s expectation. Unfortunately, the bans is still being seen as a likely impediment to the success of this exchange rate policy. The reason is obvious, importers will not relent in finding forex to fund these items. Something has to give.
CBN Intervention – Another point of note in the last one week is the role the CBN will be playing in ensuring currency stability. Everyone had feared that volatility could hold sway once the policy comes into effect considering the unmet demand that had lingered in the books of most banks for months. However, the Central Bank has remained a major supplier of forex in the interbank market frequently meeting bids placed by participating banks. The Central Bank has sold FX for virtually every single day since the new interbank foreign exchange market started. This is probably the main reason why the exchange rate has been stable.
Backlogs cleared – For months, analysts had alluded to a backlog ranging from $3 billion to $9 billion as an overhang that will be hard to clear by the CBN if it eventually devalued. The CBN did not devalue but went a step further by floating the Naira. As mentioned above, we wondered how they were going to fund the backlogs without causing volatility in the market. What happened next was another surprise to analysts. The Central Bank, cleared all the so-called backlogs that was thought to be a major recipe for volatility. The CBN used a combination of cash and forward market deals to clear the backlog in one fell swoop. This helped calm the market paving the way for people who actually needed forex for legitimate transactions to create the right demand.
Oil Majors foot-dragging – Something else we observed is the fact that oil majors who are expected to help provided liquidity in the interbank market are still foot-dragging. Sources inform us that oil majors are set to enter the market in larger quantities suggesting a further strengthening of the Naira. No one knows for sure when this will happen and so we remain expectant of an increase in liquidity.
Parallel Market Premium – When the CBN announced a float of the currency the impression was that the exchange rate at the parallel market will strengthen. It did strengthen, with the exchange rate rising from as low as N370 to about N325 before weakening again to N345 as at Monday the 27th of June. Poignant in all of this is the fact that the Naira at the parallel market is still trading at a premium of 22% to the rate at the Interbank. Analysts expect a range of between 5 and 10% as ideal premium considering that we still have the overhang of the banned 41 items and the exchange controls that still remain. This suggest a price of about N310 assuming the official rate remains at N282. This is one space we will be watching for a while to come.
Arbitrage still on – We have been getting reports that some elements in commercial banks are still engaging in activities that suggest round tripping. For example, a depositor informed Nairametrics that his bank debited his accounts just a few days before the flexible exchange rate was announcement was made at a price of N197, only for them to return the money claiming that the exchange rate had since changed. Stories like these abound confirming that the dirty practices that was prevalent in the fixed exchange rate system still exist. The CBN will have to improve on its oversight functions and clamp down of unscrupulous behaviors of some of our commercial banks. Depositors also need to be better informed.
Foreign Investors are watching – Last week we featured an article from Reuters confirming that foreign investor apathy still exist. They are watching intently at how all this plays out. We also do not expect them to come right back until they get some green light from the likes of JP Morgan and the trio of Moody’s, S&P and Fitch. They are also watching the president intensely and will always put a premium to anything he says that suggest a threat to the floating of the Naira.