The Central Bank caved a few weeks ago and dropped its naira fixing policy. According to the official announcement they were going to adopt a new floating regime with exchange rates determined by market conditions aka demand and supply. A policy shift that most, including myself, applauded. Except one guy like that who didn’t seem so thrilled. But anyway.
The market was launched on June the 20th and we all watched to see how the naira would cope with its new floating status. Because government people have a habit of saying one thing and doing another. Unfortunately, after two weeks of observation it’s all beginning to look a little suspicious.
Lets ignore the fact that the vice president and the minster of petroleum and a few other government people were able to predict what the new “floating” exchange rate would be more than two weeks in advance. Lets just ignore that.
A quick lesson. What do floating currencies look like? We are not the only country floating our currency so what do the others look like?
First we have South Africa, although their currency is a bit more volatile that the average. Still lots of ups and downs.
Then we have Kenya. Also floating. Not as volatile as the South Africans but still lots of ups and downs.
We can also check out the Euro which is traded and used more widely. Similar patterns. Ups and downs and all that.
What is the morale of the story so far? If a currency is floating then it must have some volatility. It must go up and down depending on what is happening. What has happened to the naira since the float?
Or if we zoom into the last month….
Yes. Look at it. You see it too. Even though the naira is allegedly floating it has been suspiciously flat. Almost as flat as before the float. Just at a new rate.
Hmmmm.
We are not the only ones who used to have a fixed exchange rate and abandoned it. Others have done that too. Maybe we can learn from these others what should happen after you abandon a currency peg and float. And also what happens if you abandon a currency peg for another currency peg.
First Egypt. They abandoned their currency peg in March but didn’t float. They claimed they floated the currency at the time but really just moved to another currency peg.
Looks familiar eh?
One the other hand we have Azerbaijan who abandoned their currency peg in December but actually moved to a float.
It is really beginning to look like the naira is in the same camp with team Egypt. The team that said they floated the currency but didn’t really do it.
But that’s not all. More evidence of foul play.
On June the 23rd an event happened. The event known as Brexit. Brexit was an important event because it was kind of surprising. The result of the surprise was an almost global readjustment in the relative values of many currencies.
The shock hit the British pound
The euro
The Chinese renminbi
The Indian rupee
The Kenyan Shilling (a little)
The South African rand
and even the Ghana cedi
What happened to the Nigerian naira on the official inter bank market? You already know. Nothing. Not even a blip.
To put this in perspective, arguably the biggest currency event since the 2008 financial crisis happened and the official free floating inter bank market did not even blip.
The argument some would make is that all the international players had already left and so Nigeria was already isolated and insulated from global factors and so on. To answer that we can look at the black market. The currency market we all know and love and one we are sure is really floating. What happened to the unofficial USD exchange rate after Brexit?
What about the British pound to naira exchange rate?
In case it is not clear enough you can look at the implied dollar pound exchange rate on the unofficial Nigerian black market. That is, if you sold dollars for naira on the black market in Nigeria, and then bought pounds with it also on the black market in Nigeria. Or the other way around.
It is very clear that the Nigerian black market for currencies responded to Brexit like all other international markets did.
Q. If the black market responded to Brexit, why didn’t the inter-bank official market respond?
A. Because the official market is rigged.
Central Bank credibility balance: zero.
If you have an alternative explanation please drop a line in the comments section. All official data is from Bloomberg. Data on black market rates is the sell rate on Everdon BDC twitter feed. (I didn’t ask them before using it so please don’t use this post as an opportunity to harass them.)
Homework: Brexit did something else to the Nigerian currency black market. What was it?
This article was originally published on the Medium page of Nonso Obikilli. Nairametrics obtained permission from Nonso to Publish the article. Follow Nonso on twitter @nonso2
Perfect analysis. What’s is our advice for CBN?
I actually laughed when i saw the USD-NGN chart. Its truly hilarious! Things like these are inevitable when Politicians interfere with the work of professionals.
Someone needs to remind the people at CBN that we have good analysts, within and outside Nigeria, who can see through their “covert” actions.
Absolutely hilarious
Absolutely hilarious
interesting analysis but what has changed in the economy since the floating, same import dependent economy, no major exports other than oil that can bring the major varied inflows that can shift the exchange rate in the interbank, major economic activities revolves around the 41 banned items which will continue to influence the black market, Foreign Investors are still wary of the economy, there won’t be any blip bcos the interbank is insulated from major economic activities…
Beautiful piece