New Telegraph

Persistent naira volatility casts doubt on FX unification policy

When in its bid to defend the naira and ensure exchange rate stability, the Central Bank of Nigeria (CBN), on June 14, last year, announced that it had collapsed all segments of the foreign exchange market into the Investors and Exporters’ (I&E) window-forex rates unification- as part of new forex market reforms. The move was greeted warmly by a lot of financial experts, who in recent years, had touted the policy as the panacea to Nigeria’s perennial forex crisis.

Positive expectations

For instance, reacting to the policy, J P Morgan predicted at the time that it was likely to lead to the naira strengthening to about N600 to the dollar in the near term. The American financial institution said that although it would take a few days for the dollar/naira spot to stabilise, it fully anticipated an initial overshoot towards the parallel market rate of below N750 per dollar or higher. “While it will take a few days for USD/NGN spot to settle, we fully expect an initial overshoot towards the parallel market rate of -750 or higher, after which, we expect USD/NGN to settle in the high 600s over (the) coming months,” the bank said at the time. Also, in their reaction to the forex rates unification, analysts at CardinalStone Research predicted that it would boost the country’s exports. The analysts said: “On the export front, we expect the naira unification, which also implies an effective devaluation to us, to increase the naira equivalent of Nigeria’s export proceeds. “The weaker currency will also increase the attractiveness of Nigeria’s export goods in international markets, cascading to greater demand from consuming nations barring responses from competitor countries to retain market share. We, however, note that there is likely to be an offsetting impact from the cost of imports.”

Impact on inflation

In fact, concerns that the devaluation of the naira occasioned by the policy could worsen inflation, given that it came on the heels of the Federal Government’s removal of fuel subsidy, were dismissed by proponents of the policy. Specifically, analysts at Financial Derivatives Company (FDC) Limited said at the time that while fuel subsidy removal would worsen inflation, unification of the exchange rates was likely to have limited impact on price levels because imported commodities were currently priced with the parallel market rate. As the analysts put it, “Nigeria is currently embarking on structural reforms, including a fundamental change in an expensive petrol subsidy regime. It is also attempting to dismantle a cumbersome forex system which in theory is a floating rate but in practice is as rigid as it comes. “While the removal of petrol subsidy is likely to push up inflation by about 3% to 25.4% in the short-term, fears that exchange rate unification will also stoke inflation are misplaced. This is because imported commodities in Nigeria are currently priced using the parallel market rate. Therefore, a floating of the naira is unlikely to have a major impact on the price level.” In a report released around the same time, global investment bank, Morgan Stanley, also stated that it expected the impact of the fx unification policy on inflation to be limited, as the parallel market rate was already being used to set the prices of most goods. In the same vein, reacting to the naira volatility triggered by the unification of the forex rates, the Director and Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, predicted in a report, released in July, that the volatility would ease before the end of last year. He stated: “Inflationary pressures may intensify in the near term, the exchange rate may come under pressure in the short term as forex demand backlog exerts pressure on the official forex window. But the pressure is expected to ease before the end of the year. This would pave way for an equilibrium exchange rate, which would be more tolerable and sustainable.” He, however, urged the fiscal and monetary authorities to address the negatives effects of the reforms. According to him, “there is an urgent need to address the social outcomes of the recent reforms, especially the inflationary pressure induced by the fuel subsidy removal. Urgent measures need to be put in place to mitigate the soaring cost of living and the escalating operating and production costs, especially for businesses. “Meanwhile the CBN should put in place a sustainable intervention framework to moderate the volatility in the forex market.”

Third worst performing currency

But as 2023 came to an end, the naira showed no sign of rebounding. Instead, the local currency had plunged so low against the dollar that Bloomberg in a report, on December 29, rated it among the world’s worst performing currencies of 2023. The report said the local currency was poised for its worst year since Nigeria’s return to democracy in 1999, adding that analysts are predicting that it will further depreciate in 2024. Bloomberg noted that the naira plunged 55 per cent to N1,043 per dollar on the I&E window as of December 28, 2023, making it the world’s worst performer last year after the Lebanese pound and the Argentine peso among 151 currencies tracked. The news agency reported Vetiva Capital Management Limited as saying that unless the Federal Government lures international investors or ramps up oil output, the local currency might slip further. It also quoted a senior economist at Tellimer Ltd. Patrick Curran, as saying that “it’s clear that further devaluation — alongside tighter monetary policy — is needed to reduce imbalances in the FX market.” “A significant rise in external reserves, material increase in foreign exchange inflows, and reduction in money supply,” will be positive for the naira, Vetiva Capital said in a note to clients, according to Bloomberg. Perhaps, recognising that the fx unification policy had not yielded the desired result, CBN Governor, Olayemi Cardoso, in his address at the Chartered Institute of Bankers of Nigeria’ (CIBN) annual dinner on November 24, said the apex bank would introduce a set of new rules and guidelines to achieve exchange rate stability. He said: “In order to ensure the proper functioning of domestic and foreign currency markets, clear, transparent, and harmonized rules governing market operations are essential. New foreign exchange guidelines and legislation will be developed, and extensive consultations will be conducted with banks and FX market operators before implementing any new requirements.”

Kicking off on weak note

Still, the naira kicked off the new year on a weaker note in the official market on January 2 as it closed at N988.46/$1 and further weakened to N1,035.12/$1 on January 3. It, however, continued to trade flat at the parallel market where it has exchanged at between N1,200 and N1,222 per dollar in recent weeks. Although the local currency appreciated to N869.013/$1 in the official market on January 5, it generally headed south in that segment of the forex market last week, falling to N1,082.32/$1 on January 10 despite the CBN’s announcement on January 8 that it had paid nearly $2 billion in outstanding foreign exchange forwards in the last three months as part of efforts to clear an estimated $7 billion backlog in forex forwards that have matured. On December 29, the Federal Government announced that it had received a $2.25 billion foreign exchange support facility from the African Import-Export Bank (Afrexim). The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, who disclosed this, said that the amount was the first tranche of the $3.3 billion crude oil prepayment facility sponsored by the Nigerian National Petroleum Company Limited (NNPCL). He noted that the loan was aimed at resolving the acute FX shortage that has negatively affected the economy. Edun had also disclosed that the balance of $1.05 billion would be received in the first week of January.


However, financial experts now seem sceptical about the chances of Nigeria achieving exchange rate stability in the near term at least. For instance, in a report released over the weekend, FDC stated: “Although the CBN secured a $2.25 billion loan from Afrieximbank, the pressure on the naira is yet to ease. This is largely attributed to the persistent forex supply shortages in the forex market. Naira depreciation is a major stoking factor of inflation, therefore, the sustained decline in the value of the naira will continue to fuel inflationary pressures in the country. Already, inflation spiked 0.87 per cent to 28.2 per cent in November 2023 from 27.33 per cent in the previous month.” Similarly, in his presentation at the First Bank of Nigeria Limited’s Nigeria Economic Outlook 2024, in Lagos on Friday, the Founder and Chief Consultant of B. Adedipe Associates Limited (BAA Consult), Dr. ‘Biodun Adedipe, said: “We expect average official rate at N900/$1 and parallel market average of N1,235/$1.” He stated that while his firm envisages exchange rate stability for Q1’24, if he were in a position to advise the President, he would recommend that the apex bank should “take a second look” at its exchange rate unification policy. According to him, while the policy has several benefits, including resulting in more money being received by the three tiers of government from the Federal Account Allocation Committee (FAAC), it has led to the devaluation of the naira on the official market, thereby fuelling inflation as merchandise traders price their products based on the local currency’s value in the official market.


The consensus in financial circles, however, is that unless the fiscal and monetary authorities find a way of boosting forex liquidity, ensuring exchange rate stability will continue to be a major challenge for the country.

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