The naira’s resistance to the dollar is eroding just a few days after it gained some ground in the parallel market. The naira fell to about N498/$ on the black market over the weekend, down from 490/$ on Thursday.
The local currency experienced a brief boost after the Central Bank of Nigeria (CBN) directed money deposit banks (MDBs) to sell to end-users for personal travel allowance (PTA).
Following the directive, banks increased their campaigns targeting forex businesses, while the resurgent dollar temporarily retreated. Prior to the CBN’s intervention, the dollar had surpassed N500/$ as speculators took control of the market.
Former CBN deputy director Stan Ukeje warned that the CBN’s gesture had been hijacked by racketeers and was not sustainable. He observed that those applying for FX for PTA may be doing so for arbitrage purposes.
Ukeje noted: “With little regard to the precarious inflow of foreign exchange, money deposit bank (MDBs) advertise the availability of foreign currency for would-be travellers and bureau de change (BDCs) get enhanced supply of foreign currency at below Nigerian Autonomous Foreign Exchange (NAFEX) rate. The hope is to lower the expectation of naira depreciation but it does not work out that way.”
He predicted that the (CBN) would run out of ammunition and that the local currency would continue to fall.
“Those who otherwise will not travel do and those who have full information enter the market for the purpose of arbitrage because they know that the policy will not last. The supply splurge is from the CBN. When it exhausts its firepower, the slide in the exchange rate will resume,” he said.
Ukeje previously stated that the current NAFEX is “incomplete” because major FX earners, such as the Nigerian National Petroleum Corporation (NNPC), do not participate in the market.
Experts had advised that setting a market-clearing exchange rate was the best option for resolving the currency crisis because NAFEX does not achieve the market equilibrium required for stability.
Both the World Bank and the International Monetary Fund (IMF) sought full harmonisation of the various exchange rates last week, claiming that it was a necessary action point to achieve stability.
Though they praised the use of NAFEX for official transactions, they cautioned that a broader reform of a market would be required.
Last month, the Central Bank abandoned the previous official rate for NAFEX, also known as the investors’ and exporters’ (I&E) window, on which the monetary authority had promised to pursue rate harmonisation.
The difference between the two markets is approximately N85/$, with NAFEX currently trading at N411/$ last week. Financial experts are concerned that the large disparity will continue to incentivize round tripping and other historical market manipulations.