The Governor of the Central Bank of Nigeria, Godwin Emefiele advised investors in the U.K that he expects the true value of the naira to be between N430-440 to the dollar.
Mr. Emefiele made this comment in a Webinar organized by the Standard Bank of Africa (parent company of Stanbic IBTC Nigeria). According to sources who attended the event on Monday, Mr Emefiele told participants that the current exchange rate at the parallel market was between N430-440/$1 and not the black-market rate which closed at about N500/$1.
In an apparent attempt to woo foreign investments, the CBN Governor also encouraged foreign investors to reconsider their waning interest in Nigerian Equities suggesting that some of the stocks were undervalued. Nigeria’s capital importation data into equities was just $755 million in the whole of 2020 compared to $1.8 billion in 2019.
The absence of foreign portfolio investments in equities and bonds has added to the ongoing liquidity challenges being faced in the FX market which partly explains why the CBN Governor is attempting to attract more foreign investors.
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Exchange Rate Disparity
The exchange rate between the USD and Naira currency pair has oscillated between N485–N500 in the last 3 days driven by speculators trying to preempt CBN intervention.
The rumour towards the end of last week was that the CBN was about to inject millions of dollars into the system which they opined could force prices down. This rumour was driven by a scathing World Bank report which blamed the Central Bank of Nigeria’s sub-optimal management of the foreign exchange regime as the reason for the increasing disparity between the official and parallel market rates currently being experienced in the country.
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According to the World Bank, the central bank’s management of the exchange rate reduced supply in the market thus affecting investor confidence and ultimately leading to a ditch of the official market for the black market.
“The way the exchange rate was managed limited access to FX and thus adversely affected investor confidence and investment appetite,” the World Bank stated.
The disparity between the official and parallel market rates has remained a major factor for the return of foreign portfolio investments into the country. Since the forex crisis began in 2020 the exchange rate disparity has hovered between N70 and N90 allowing speculators to arbitrage.
Meanwhile, at just over $33 billion, Nigeria external reserves is at a 4-year low despite the recent rise in oil prices and the positive outlook for the energy sector. The drop in reserves is expected to pile pressure on the central bank to make a decision on whether it wants to continue defending the exchange rate or allow it to move to the N430 range which Emefiele mentioned.
If it continues to fall further, the apex bank might be left with little choice but to force another round of “currency adjustments” like they did last year. However, if oil prices continue the current bullish run and Nigeria’s crude sales volume increases, then the CBN could likely maintain rates along the N410/$ target which it prefers.
The former seems more plausible which explains the desperation to get foreign portfolio investors back into the country.
Update: An earlier version of this article erroneously stated Mr. Emefiele said the rate was N430-455/$1. The article has now been updated accordingly.