The naira continued to strengthen on the parallel market on Wednesday, brightening prospects of meeting the N350/$ exchange rate target by the Central Bank of Nigeria (CBN).
The value of naira firming to N400 per dollar indicates that the Central Bank of Nigeria (CBN) is almost close to achieving its target of N350/$ and closing the gap between the official inter-bank and black market, some analysts said last night.
With the introduction of wholesale intervention in forwards at the inter-bank market on February 20, 2017 by the CBN, the nation’s currency has gained N120.00k; representing 23.1 percent compared to N520 per dollar traded a month ago at the parallel market.
Despite these interventions, the economy has witnessed over $6 million accretion to the foreign reserves, a development some analysts say beats all imaginations.
“CBN will keep dollar sales steady until it crushes currency speculators and there is a convergence of the official and parallel market rates, according to a senior source at the apex bank. “Much of the dollar demand had been a bubble created by speculators and hoarders of the greenback, who are heading for major business losses,” added the source.
In all, the new FX measures introduced by the CBN aimed at improving liquidity in market have led to the appreciation of the naira by N85 in just one month. CBN has been intervening on the official market to try to narrow the currency spread with the black market rate, which was 520 to the euro a month ago.The naira was quoted at 307.50 on the interbank market on Wednesday
Some analysts say last night that naira appreciation and foreign reserve accretion would brighten the chances of the $500 Eurobond approved by the senate yesterday
“Raising an additional $500 million is positive as it would provide much needed funds to implement the budget and boost economic activity,” said Ayodeji Ebo, acting managing director at Lagos-based Afrinvest Securities Ltd.
“Given that investor confidence is likely to benefit from the improvement in the foreign exchange market and rising external reserves, the new bond could be priced much lower than 7 percent,” Ebo added.
Business Day investigations show that several parallel market operators who had been stockpiling dollars for months, were seen lamenting that the CBN’s intervention was forcing them to offload their dollars at a loss.
“The regular intervention by the central bank has increased liquidity in the official market. The new policy has also eliminated spurious demand for the dollar,” Aminu Gwadabe, the head of Nigeria’s exchange bureaus, told Reuters.
Speculators betting on a naira fall “are taking a risk and will lose,” central bank Governor Godwin Emefiele said on Tuesday. He added that he expects the black market rates to narrow further.
“We see the naira stabilising around 380-400 to the dollar, but the central bank must review the multiplicity of rates to restore confidence in the market,” Gwadabe said.
In February the bank devalued the naira for private individuals, saying it will sell dollars to them at 375 per dollar, a 20 percent margin from the official rate and half the premium obtained at the black market.
The move has left the West African nation with at least five exchange rates – the official one, a rate for Muslim pilgrims going to Saudi Arabia, the one for school fees abroad and a retail rate set by licensed exchange bureaus at 399.
Razia Khan, head of African research at Standard Chartered bank, London, said last night that the battle may not be won yet despite the good showing of the local currency against the greenback.
“No, the battle is not over. Nigeria’s current FX regime leaves it vulnerable to any sharp decline in oil earnings. Such a situation would put pressure on FX reserves, and maybe bring about a more severe FX shortage, which would be negative for the economy.
“Given Nigeria’s dependence on a single commodity, it would do better to mitigate its external risk by adopting a more flexible currency regime. A floating FX rate would serve as a better buffer, protecting both FX reserves and the underlying economy from the full impact of any negative development with oil earnings.
The exchange rate would have an ability to absorb at least a part of the shock.
Nigeria needs a floating exchange rate buffer. It does not have one in place, and this is why the real economy and FX reserves have borne the brunt of past crises. It needs to seek that improved balance between protecting growth and protecting the FX rate.
It cannot and should not protect the FX rate at the expense of growth. Middle of the road solutions work better than extremes. Nigeria’s fixed FX rate represents an extreme,” Khan said in an email response to Business Day.
The naira appreciation is supportive for risk premiums, according to Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
“The market appears to be reacting to CBN Governor Godwin Emefiele’s comment that the apex bank was committed to sustaining dollar sales to prop up the naira,” Ibrahim added by phone.
Emefiele had vowed to ensure a convergence between the multiple rates in the foreign exchange market on Tuesday, at the conclusion of its monetary policy meeting, where key rates were left unchanged in line with market expectations.
