Nigeria: CBN Governor Confirms Exchange Rate Unification Plans

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The Governor of the Central Bank, Godwin Emefiele, has confirmed that the Central Bank will continue to pursue unification around its Nafex rate. The NAFEX rate is the forex window where Investors and Exporters transact dollars on market-determined prices.

The CBN Governor said this at an Investors Conference with the Federal Government of Nigeria by CitiBank. The conference which was held online was titled COVID-19. Economic and Budgetary Update. Nairametrics listened in on the Conference.

Nigeria was represented by the following government officials;

  • Zainab S. Ahmed – Finance Minister
  • Godwin Emefiele – CBN Governor
  • Patience Oniha – DG DMO
  • Ben Akabueze – DG Budget Office
  • And a representative of the Hon. Minister of Health.

According to Godwin Emefiele, “We will continue to pursue unification around the NAFEX Market”. The CBN Governor also mentioned that as at December 2019 Nigeria saw a“relatively stable market because the NAFEX rate and rate that the Central Bank does transaction outside the NAFEX was close to themselves.” And that “at some point, the NAFEX rate me below the Central Bank rate”

Nairametrics was first to report last week that the government was considering a unification of the exchange rate and could unify the rate around the NAFEX (I&E) window rate or the official CBN rate of N360/$1. The latest comment from the CBN Governor suggests they might be unifying along the lines of NAFEX.

Mr. Emefiele also commented on the disparity between the parallel market and the NAFEX rate claiming it is a market for people who are “doing dealings that are not recognized by authorities”

According to Emefiele, ”The CBN has always maintained that the black market is not a good determinant of the value of the naira. You’ll find that people who are in a hurry and do not want to procure the kind of documentation required, will sometimes rush to those markets. But we have used the period of this pandemic to prove that anybody dealing in that market is dealing in an illegal business.”

He also claimed that the COVID-19 pandemic has buttressed claims from the bank that most of the pent-up demand was not realistic. He cited the impact of the global lockdown on flights as a clear example. “These airlines are not flying and sometimes you find dollars being sold through the BDC’s into that market just to be seen that we are doing everything possible to moderate the rate,” Emefiele said.

He continues that because “airlines are not flying, and people are not traveling so there should therefore not be any demand for forex exchange in that market”.

Insisting that the trades in the black market are counterintuitive he went further to accuse those trading in the black market as those dealing in corrupt practices. “It could only be those who are dealing in what is simply called corrupt practices that will be dealing in that market and we are not about to talk about unification of our exchange rate around people who are dealing illegally,” Emefiele added.

He also claimed anyone who was willing to deal in forex should utilize the “recognized” NAFEX market which is why “unification will have to be around the NAFEX”

The Federal Government disclosed plans to unify the exchange rate in order to generate more revenue and manage the rate in a sustainable manner. The IMF had previously pointed out that unifying the exchange rate will impact the economy more positively than the multiple exchange rates, which creates a lot of opportunities for arbitrage. The unification also curtails situations where public and private sector decisions are distorted as a result of uncertainties.

The CBN Governor also responded to questions about lack of liquidity in the NAFEX window which Nairametrics reports averages between $4-60 million daily. In response to how the backlogs will be alleviated, he said that “the external reserve still remains about 36 sic ($36 billion) and will imagine it is enough to make somebody do business in Nigeria.”

The CBN also attacked claims about higher dollar demands citing the shut down of manufacturing in the country as an example. “When somebody comes today to tell us they want to open fresh LC (Letter of Credit) we begin to wonder the motive behind that” he chided. The CBN Governor also claimed maturing obligations will be honored and that “we the CBN….stands ready to ensure that where there is shortage of FX in the market where the banks cannot find FX to meet those obligations we will come in to support the market and that we do from time to time.”

The CBN Governor also tried to calm fray nerves explaining that some of the dollar demands were also from foreign investors and some people who wanted to “front load” their dollar demands, that they do so in an “orderly fashion” and that they will be paid their money claiming Nigeria met all demand for those who were patient in 2016 when Nigeria was in a similar FX crisis.

Upshots: It is unclear what impact Mr. Emefiele’s remark will have on the market as most market analysts who spoke to Nairametrics on the condition of anonymity have a different view. They insist there is legitimate pent up demand of up to $5 billion as liquidity shortages continue to affect the NAFEX market. However, these claims have not been substantiated as there is no official record or data where demand is published.

This session was organized to help calm the nerves of foreign investors now awash with bailout dollars but worried about Nigeria’s faltering economy and its likely ability to trigger further devaluation. Mr. Emefiele did not confirm if another devaluation was in the offing.

— Nairametric

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