FX: Analysts Doubt CBN’s Adoption Of ‘Market-Determined’ Rates

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Analysts at FBNQuest Research have said that they are not “convinced” by the Central Bank of Nigeria (CBN)’s pledge to adopt market-determined foreign exchange rates. Commenting on recent developments in the country’s fx markets, the analysts said: “CBN has moved close to unification of rates and may well complete the exercise in the months ahead.

We are less convinced by its pledge to adopt ‘market-determined’ fx rates because of its preference for managing and administering the market.

“The government’s rate is now the NAFEX rate, which it does not set, but which it can guide, being a core supplier of dollars (particularly when the foreign portfolio investors ((FPIs)) are not tempted by the returns). We therefore see a slow downward trend for the naira under the guidance of CBN.

This time around, we doubt that the FPIs will shore up reserves. Support will come in the form of an oil price recovery, a possible new allocation of Special Drawing Rights (SDRs) and, the FGN trusts, the release of multilateral loans.”

The apex bank had on May 24 migrated to the NAFEX rate of N410.25 /$1 from the former official rate of N380 per dollar, a move analysts said, was in line with the regulator’s efforts to unify the country’s multiple  exchange rate regime. CBN Governor, Mr. Godwin Emefiele, told journalists at the end of the Monetary Policy Committee (MPC) briefing last month that the bank was no longer dealing on the N380 per dollar official rate.

The World Bank and the International Monetary Fund (IMF) have frequently complained that Nigeria’s multiple currency regime frustrates businesses, advising that the rates should be unified in order to attract investment.

There are indications that the World Bank has linked approval of a $1.5 billion budget support loan for Nigeria to currency reforms Analysts have attributed recent volatility of the naira, especially at the parallel market, to speculation triggered by CBN’s adoption of the NAFEX rate.

The naira weakened further at the parallel market last Friday, falling to N502 per dollar from N499/$1 on Thursday, data obtained from abokifx. com shows. The local currency, however, closed stronger at N410.75 per dollar at the Investors and Exporters’ (I&E) window compared with N410.90/$1 on Thursday.

The naira was on a free fall at the parallel market in the penultimate week, plunging to N495/$1 last Thursday from N487 per dollar at the beginning of the week. Meanwhile, FBNQuest analysts have predicted that Nigeria’s GDP will grow at 2.8 per cent and 2.7 per cent in 2021 and 2022 respectively.

According to the analysts, “the economy has posted modest GDP expansion for two quarters but we struggle to see growth rates reversing the steady decline in incomes and the rise in poverty.

COVID-19 and its global impact have exposed the weaknesses of the macro story, namely the continuing dependence on oil, the huge untaxed informal economy and the stuttering efforts at reform.

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