Last week saw a rare sell-off in the FX parallel market. After recording all time lows the previous week, the naira strengthened to between ₦440 and ₦460 per US dollar following the release of new foreign exchange policy guidelines by the Central Bank of Nigeria, and subsequent market intervention.
The question at this point is which market reflects the true value of the naira. Is it an under-supplied interbank market into which CBN intervenes to repeatedly to cushion the closing rate? Or is it an equally under-supplied parallel market?
The policy actions of CBN are tailored at meeting specific demands, and the action caused speculators to sell off some of their dollar holdings and wait for the exchange rate to stabilise before taking further decision. Within a few months it will be summer time in Europe and America, and the demand for dollars will rise again. If the CBN is able to provide the extra supply in the official market then rates could remain around current levels, if not the chase for naira’s true value will continue into the “ember” months.
We think that the CBN is losing a crucial opportunity to correct years of market controls which it has proven unable to sustain once the dollar supply is affected by events such as the drop in oil price. The main reason for this is political, and the CBN has chosen to sacrifice sound economics on the altar of political expediency. These controls, where CBN is the main supplier of FX in the market means that growth and economic activities are somewhat limited by the CBN’s capacity, a situation which is a handicap to an economy that should ordinarily be growing rapidly.
It is clear that the CBN cannot sustain this level of interventions for long. It will deplete its dollar supply and in the end achieve nothing significant. While we accept that a full float at this time, two years to elections will be politically imprudent, a policy approach that may work is to drive down the FX rate by the current oversupply, flush out speculators and follow up with a managed float to let the market determine the price without the added pressure of the speculators hoarding. We think there is a sliver of hope that the Acting President might consider this approach, if he is in power long enough to implement it before President Buhari returns.