Nairametrics| This is really becoming tiring but we must. The central bank announced yet another intervention program disguised as a policy yesterday. The policy may be in response to marching orders received by the central bank governor during the last FEC meeting to reduce the spread between the interbank and black market. The spread has risen to N200 per dollar (66%) in the last few days.
The summary: the CBN is going to start selling dollars, again, to people who need to pay school fees, medical bills and those who need to travel (also known as noisemakers, seedless grapes twitter, or more generally the upper middle class). Dollars will be sold at not more than 20% over the interbank rate which puts it at around N375 per dollar. No working was shown on how they arrived at the magic 20%.
Is this action going to close the spread between the interbank and black market? It probably won’t, at least not by much. Why?
The graph above is the spread between the interbank and BDC segment. As is pretty obvious, the spread started to go out of control when they got tired of blowing the reserves trying to fix the exchange rate, and decided to just ban people from the official market. It started coming down when we thought they had given up that policy and floated the currency. But then we found out that was a lie and it went back up again. Besides a few blips it has not looked back since.
Will this policy bring the spread back down? No, because they are still fixing prices. The 41 item exclusion list is still there. Although they have a few extra billion dollars in reserves, that won’t last.
A part of me wants to think this is the start of some systematic plan to clear out the bad policies and revert back to a simple and free market. But its probably just the central bank, finding a few loose dollars, grasping at straws again.
A country’s ability to fix a price on its foreign exchange is its right as long as it has the ability to truly defend that price..In your article you failed to take into consideration or mention a major issue…that is…how much dollars are being hoarded or available in the black market…no one can really know that as it can’t really be measured…but make no mistake that money runs into billions of dollars..the trick here is how do u encourage people to sell their dollars or how do you restore confidence in the naira so that speculators cannot be having the field day they are having..the answer to that is simple..hit them where it hurts…the CBN can’t just freefloat like that without having an idea of where the naira can hit..it first has to see how low the parallel market operators will sell their dollars…so if due to this CBN new policy today 20% of the demand is removed from the parallel market we can assume a 20% drop in the parallel market rate to around 420 or 430…in such a case it will be much safer for the CBN to free float than to free float now when the parallel market rate is 520..its really not rocket science