CBN sets stage for devaluation, hands-off naira

The Central Bank of Nigeria (CBN) has set the stage for the devaluation of the naira, as it said on Wednesday that it will allow the naira exchange rate to be market-driven.

This will begin from June 20.

The CBN will select a group of around 10 primary dealers through which the naira will be traded. There will only be one exchange rate and the bank will intervene in the market “as the need arises,” Governor Godwin Emefiele told reporters in Abuja.

“We’re talking about an open, transparent two-way system,” Emefiele said. “It’s intended we don’t have speculators and rent-seekers. I don’t expect that any other exchange rate will be recognized.”

Three-month non-deliverable naira forward contracts surged as much as 9.5 per cent to a record 333 per dollar after the announcement, suggesting traders expect the currency to trade around that level in the market, compared with the current official rate of 199.

There have been several calls on government to devalue the naira, but the administration has stood its ground, with President Muhammadu Buhari always asserting the Nigerians have never gained from previous devaluation of the naira.

Emefiele said last month the central bank would implement a “flexible” exchange-rate policy to help alleviate a dollar shortage that has strangled the economy.

Read also: FG overshoots Q1 budget estimate, records N725bn deficit

 

Analysts project that the naira will probably trade in a range of 280 to 350 against the dollar after the central bank implements its decision.

While a devaluation of the naira had long been expected, experts predict that its impact on the economy is expected to be gradual.

A constant worry for the Buhari-led government remains the diminishing capacity of the administration to boost its forex earnings in the face of massive disruptions of crude oil exports. While the government claims that the nation’s oil exports have slumped to about 1.5million barrels per day (bpd) from 2.2m bpd, unconfirmed sources estimate that exports are down by nearly 50%, placing the figures at a little over 1million bpd.

With no other robust source of immediate forex inflow, the scarcity of foreign exchange is likely to persist, analysts say, and this may not be helped by the marginal increases witnessed in the global oil market.

CBN’s promises to support the market by servicing its obligations to various stakeholders has received little cheers, especially as government itself cast doubts on the financial system by massively trimming the 2016 capital budget by 50%, tacitly acknowledging that income projections were highly suspect.

The nation’s apex bank, however, hopes to reap from its new policy initiative as it projects a handsome repatriation of the over $20billion held by Nigerians abroad in the near future. The argument is that as the financial system stabilizes and economic indicators become increasingly predictable, Nigerians holding surplus cash outside the system will be motivated to repatriate same in the hope of higher yields.

If this happens, it is expected to induce a sobering effect on the market, leaving exchange rates at comparatively reasonable levels.

As the country settles down to CBN’s floating exchange rate policy, analysts are burying themselves in the new policy document in the hope that the windows that created inefficiencies and distortions in the financial system will truly be shut.

See the new policy document below: 

Revised Guidelines for Flexible Exchange Rate Market June 2016 v1

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