Nairametrics| The exchange rate between the naira and the dollar on the parallel market has dropped below N400 for the first time since August 23rd 2016. This is according to Nairametrics Exchange Rate tracker.
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This represents a significant price point for the CBN’s defense of the exchange rate which it started in late February 2017. Whilst we do not know for sure how long the CBN can keep defending the naira, it’s hard to deny the fact that the policy introduced to reduce the exchange rate disparity between the naira and dollar on February 20th 2017 is working.
Our investigation suggests that the key reason for this are increased supply to the retail end, continuous sale of FX forwards and the minimal rate of round-tripping by commercial banks. This has basically thinned out demand on the back market. Another likely reason is the drop in purchasing power of a lot of Nigerians. With little or next to nothing in disposable income, Nigerians are tired of buying dollars for safe keeping. The volatility in the exchange rate is also a dis-incentive for them. No point losing value to exchange rate wars.
Can the CBN continue to defend the naira? It’s unlikely they can continue like this for another month or two. They spent about $1.7 billion in January alone and are estimated to have spent about $2.5 billion (gross) between February and March 2017. Crude oil earnings have helped form a cushion but it might not last for long. Even if it does, it won’t be enough.
What are the options? The CBN has two major decisions to make in the coming days. It will either devalue the currency to a level closer to the black-market rate or float the currency once and for all. We had thought that the latter was a more plausible option. However, recent comments by the CBN Governor that he will not float suggest a devaluation might be on the cards. That expectation will also have to be balanced by the government’s reluctance to raise fuel prices, a direct consequence of a devaluation. Other state controlled prices also hinge on a devaluation of the naira, something the Government ‘controlled’ CBN is mindful of. This suggest the option might be to wait this out a few days more to see if the rate black market rate can come down to N380, a more acceptable rate based on the government’s antecedents.
And there is one last option. The CBN could decide to do nothing, provided it can keep supplying the retail end of the market.
Note to my earlier comment:
The different naira to dollar rates in Nigeria
naira/$
1. Pilgrims-197
2. PPPRA (Petroleum product marketers)-285
3. Budget 2017 rate-305
4. Interbank Rate-315
5. International Bank rate-319
6.Travelex rate-345
7.Special Funds Airlines-355
8.Western Union-375
9.Nigerian students abroad-375
10.Foreign medical trips-375
11.Bureaux De Change-380
12.Black Market-385
Should this be?
Here we go again….Nairametrics and the “it can’t be sustained argument”
I don’t know what kind of writers Nairametrics has…you people have been repeating your pessimistic and “it’s unsustainable” tune for months now…is it that you people are just in denial or ignorance or does it pain you that the Naira is gaining? You are saying they have sold 2.1 billion dollars…yet you fail to mention more than half of that was offered as forwards 30 days and 60 days…that means more than half of what was offered has not even left CBN coffers…but they took the Naira equivalent…which guarantees alot of Naira taken out of the market…thereby reducing the amount of Naira in circulation chasing the dollars
Second, you are talking about oil dollars alone but fail to mention how much other dollars is in the market that is being hoarded or speculated or held with illegal financial dealers…there is more dollar out there than Nigeria even knows what to do with…the key was always how to get these people to off load their dollars? The best answer to that is to reduce the demand in the parallel market by 30% and this will let all these hoarders panic and off load their dollars to compensate for the reduction in demand in the parallel market…this is why the parallel market rate is now selling cheaper than the BDC rate…who would have thought it even possible that the black market rate could drop to below the BDC rate? because everyone including Nairametrics underestimates the amount of dollars in the hands of black market dealers…last year we had 35 billion dollars in remittances from Nigerians in diaspora and in 2015 it was 26 billion dollars…the reason we didn’t feel that is because the majority of Nigerians in diaspora were using illegal IMTOs to get more naira for their dollars rather than use the BDC rate…now that the Parallel market rate is cheaper than the BDC rate all Nigerians in Diaspora will start using official BDC rates and Travelex and Western Union etc…which means alot more foreign exchange will now enter the country officially…even when oil prices was at its highest…the CBN was only using 30% of the oil money..the rest was coming in from investors and Nigerians in diaspora…its only when the parallel market rate became so high that the CBN foolishly drove all Nigerians with foreign exchange whether exporters or remittances to the black market because they can get more Naira for their dollars…now the situation is going to change
Thirdly, even if the CBN cannot sustain it…even though Emefiele repeatedly said they can sustain it…and I would believe them any day over Nairametrics because their reputation and credibility is at stake…but even if they can’t sustain it…they have put real fear into the hearts of all these Speculators and Hoarders…in the future nobody would dare risk depreciating the Naira again out of fear of another intervention by the CBN…it is no longer business as usual…where people buy dollars hoard it wait for the Naira to depreciate and sell again…those days are long gone…no fool would want to risk that again…this on its own removed massive spurious demand from the black market
Lastly, I don’t know if you checked (I am sure you people don’t) but the foreign reserves are no longer growing…for the past one week this is the first time in 6 months that the foreign reserves remain unchanged…what this means is that at 31 billion dollars…the CBN is now comfortable with our foreign reserves and will no longer work on building it in the Short run but would rather put all its dollars into the market…this is going to even guarantee the rate crashes even more
Please Nairametrics if you people need true economists I can work for you people…it’s quite obvious that your writers know squat and do not do any investigative journalism…
Nairametrics writers are not pessimistic but rather objective based on facts, CBN simply do not have enough forex to meet demand within the market. External reserves are dropping, crude oil price is dropping, foreign investors wont come in except another round of official devaluation. I am privileged to have this information. What is happening is simply what the CBN failed to understand since 2015 by stifling the retail end of the market of forex, thereby increasing the black market rate astronomically, its not about currency speculators, its simply a matter of forces of demand and supply. You cannot make it difficult for people to access forex and not expect black market rate to go bizarre. There are still all sorts of restrictions here n there simply because CBN do not have sufficient forex to pump into the market, this is not advisable anyway. Manufacturers, businesses, etc, the real productive segment of the market that require forex are still not able to access it, what is being cleared is the backlogs since 2016. And to correct an impression, when you sell forwards, it is captured in your forex account balance and your net position drops, because you must provide the forex come the agreed date.There is really no surprises with the supply to the retail end of the market, as it makes up a small % of aggregate demand, this should have been done since.Having emphasized that, until we address structural issues (which are not in the hands of CBN), CBN will only try its best, infrastructural issues, fiscal discipline (not 70% recurrent and 30% capital in the budget), Nigeria is going nowhere. It is not Nairametrics that created chaos in the market in the first place, it was CBN themselves.
You are defending Nairametrics but didn’t even comment on any of my statements Believe me I don’t need a lesson on why and how the black market came to be…and yes the CBN is the one that created this mess in the first place…but it is also the CBN that has the power to undo the damage that it did..you are still talking to me about the CBN not having enough Forex…even during the oil glory days CBN couldn’t be the sole supplier of Forex…back then…the CBN was only about 30% provider of Forex..back then the difference between the official and parallel rate was barely 5%…the incentive to round trip wasn’t really there…fast forward to the last 2 years…the difference between the official and parallel was very high…no sane person would want to earn their dollars on 300 when they can get at 450…this caused all Non CBN Forex holders to run away from the official market and sell to the black market…thereby leaving the CBN as the sole FX supplier…and making the parallel market awash with Foreign exchange…and since the Parallel market is dominated by Greedy illegal traders..their main aim was to depreciate the Naira to get even more Naira for their dollars.. if the CBN is able to converge the parallel rate as it was to 5 or 10% official rate…you will have massive amounts of dollars coming back into the system..IMF/World Bank will give Nigeria loans…foreign investors will start coming back and Nigerians in diaspora will remit money officially…because faith in the value of the Naira would be restored…you forget that oil only makes up 35% of our GDP…you are saying foreign reserves are dropping? Don’t you know in the last 6 months our foreign reserves went from as low as 22 billion dollars to 31 billion dollars as at today? Nairametrics is almost all the time pessimistic…not so long ago they had us believing the Naira was heading to a 1000 per dollar..you cannot be objective when it comes to Economics…especially one like Nigeria…if an economy was purely objective then every economy in the world would be the best
Now it is official, Naira has suffered another blow- devaluation. Get ready for another round of cost-push inflation Nigeria and the energy issues are still there, when we agree to resolve those issues, then we will see the true meaning of being a non-productive economy.
I do not see any problem here or there.i think the forex market will merge sooner or later.evrybody are expressing their opinion as they feel.this anonymous is not a Nigerian.THE DIFFERENCE IS LACK OF INFORMATION,THE MARKET IS NOT TRANSPARENT NOW.IT IS POSSIBLE THE CBN WILL AFFECTS THE MAKET AS THEY WANTS TO DO.IT WILL CHANGE,AND THERE WILL BE THE CBN WILL NOT BE ABLE TO AFFECT THE FOREX BY DIRECT MEASURES.I.E WHEN FOREX STRUCTURES AND SYSTEM ARE IN PLACES.
The main issue here is the cbn do not have sufficient supply of forex vs the demand of forex demand by Nigerians,right now,they are rationing the supply of forex,andi think they do have knowledge and the means to do what to do now and in future..in this article the nairametric lays bare the way it’s.i do not sees any biases in this article by the nairametric