The Nigerian naira has been devalued to N410.25 per dollar by the Central Bank of Nigeria (CBN).
The implementation of the Nigerian Autonomous Foreign Exchange Rate (NAFEX), also known as the Investor and Exporter (I&E) FX window rate of N410.25 as the official exchange rate to the dollar, reaffirmed the depreciation of the local currency.
The previous official rate of N379 to the dollar was withdrawn from the apex bank’s website about two weeks ago. The naira was trading at N487 to the dollar on the parallel market yesterday.
Nigeria, like other emerging market economies and countries that rely on oil exports, has seen a major drop in crude oil revenue, as well as a retreat by foreign portfolio investors, according to CBN Governor Godwin Emefiele.
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The CBN boss, speaking at the 55th Annual Bankers’ Dinner in Lagos, said the naira depreciated as a result of the need to compensate for a decline in foreign exchange supplies.
With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves.
Emefiele added that, because of the shock’s unique character, the apex bank has continued to favor gradual liberalization of the foreign exchange market in order to smooth out exchange rate volatility and reduce the impact that abrupt changes in the currency rate could have on important macroeconomic variables.
He claimed that this was in line with worldwide best practices in countries that use managed float arrangements. “At the same time, measures are being taken by the authorities to improve our non-oil exports and other sources of foreign exchange. These measures have helped to prevent a significant decline in our reserves,” he added.
As part of its attempts to deepen the foreign currency market and accommodate all FX commitments, the CBN launched the I&E forex window in April 2017.
The window’s goal was to increase liquidity in the FX market and ensure that qualified transactions were executed and settled on time.
Bismarck Rewane, an economist and Managing Director of Financial Derivatives Company Limited, wrote in a note headlined “No more official rate — act of omission or commission?” that the disappearance of the official exchange rate from the CBN website for over 11 days is being viewed by the markets as a move toward exchange rate convergence.
“In 2020, the official rate was taken down from the CBN website – but for only three days. The CBN seems to be have used the last 10 days to evaluate market reaction, which has been largely positive. This could mean the beginning of a move to a more market determined exchange rate mechanism,” he noted.
According to Rewane, the difference between the parallel (N486/$) and official (N412/$) rates has narrowed from N100 earlier this year to N74 today.
Furthermore, the transition from an auction system to an interbank market is usually preceded by the path to full convertibility. He claims the measure will assist Nigeria in meeting several pre-conditions for its proposed $3 billion Eurobond issue and a $1.5 billion World Bank loan.
Also, the IMF has frequently stated that restrictions on forex access for some types of goods, as well as multiple exchange rates, cause distortions in private and public sector decision-making. Long-term investment is discouraged, smuggling is encouraged, and corruption is possible.
The Fund believes that removing foreign exchange restrictions and fully unifying the currency rate, as recommended by the authorities in their Economic Recovery and Growth Plan (ERGP), will help to maintain the parallel market premium low for longer.
As a result, it called for a single naira exchange rate to encourage growth and attract foreign capital.
The IMF claims that foreign exchange shortages and backlogs are escalating Balance of Payment (BoP) pressures, and that exchange rate harmonization is necessary to alleviate BoP risks. The budget deficit will remain high in the medium term, according to the report, and further domestic income mobilization would be required to alleviate fiscal risks.