The naira-dollar exchange rate gap widened from N80.67 per dollar at the beginning of 2021 to N152.83 per dollar in December 2021, leaving the naira with a depreciation of 20.43 per cent.
A report by Bismarck Rewane’s Financial Derivatives Company (FDC) at the weekend underlined that many policies by the Central Bank of Nigeria (CBN) have failed to bridge the gap between the officially managed foreign exchange (forex) window of the apex bank and the parallel market, which several forex users resorted to.
According to the report, most African currencies have depreciated in value in the last three years, with the Angolan Kwanza and Nigerian naira recording the highest loss. However, in 2021, the Angolan Kwanza reversed its downward trend to be the only African currency under our review to appreciate in value in the last year. The Angolan Kwanza, which suffered a three-year depreciation of 82.8 per cent between 2018 and 2021, appreciated by 13.59 per cent between 2020 and 2021. However, the naira, which suffered a three-year depreciation of 55.92 per cent, also depreciated by 20.43 per cent between 2020 and 2021.
Meanwhile, the naira appreciated by 4.6 per cent to N416 per dollar at the official Investors and Exporters (I&E) window but depreciated by 0.9 per cent to N570 per dollar at the parallel market at the weekend.
“Although the CBN has implemented some forex management policies, like the naira4dollar promo and the recent exchange rate adjustments to improve naira stability and forex inflow, they are insufficient to ensure a naira convergence. Hence, there is the need to improve the productive side of the economy and leave the official forex rates to be market determined. This will promote naira convergence in the medium to long term,” Rewane stated.
The report noted that manufacturers have been forced to adopt a blended exchange rate of both official and parallel market rates. This blended rate ranged from as low as N430 per dollar at the start of 2021 before deteriorating to as high as N550 per dollar. This had an impact on the prices of consumer goods. In reality, the impact of an adjustment of the official rate and rate convergence could lead to an adjustment of the blended rate used by manufacturers.
“A reduced spread will decrease the incentive (arbitrage) for speculators to obtain forex at the official market and resell at the parallel market. This may result in panic dumping of dollars at the parallel market due to the concern of lower demand for forex and appreciation of the dollar at the parallel market,” he said in emailed report to investors.
CBN Governor Godwin Emefiele had explained that Nigeria, like other emerging market countries reliant on oil exports, the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into the country.
“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 said.
He added that the apex bank has continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which, rapid changes in the exchange rate could have on key macro-economic variables.
Rewane advised that closing the gap between the official and parallel market rates would likely reduce forex demand at the parallel market,thereby pushing investors and traders to the official market. This, according to him, will lead to increased forex transactions at the official market.
He explained that the wide official-parallel market spread and the low forex supply at the official market have been the main factors driving investors and traders to source forex at an expensive rate from the parallel market.
To him, reducing this spread, coupled with an improved forex supply at the official market, will decrease uncertainty (volatility) at the forex market and bolster the ability of the official window to meet a higher demand for dollars.
He argued that the resulting impact of this is that a reduced exchange rate volatility and improved forex supply would make it easier for foreign investors to repatriate their funds.
It will also ensure that traders and manufacturers can access forex at a uniform rate from both the official and parallel markets, Rewane added.
His words: “Reduced naira volatility and improved forex supply are positive for foreign direct investments and foreign portfolio investments as well as the country’s external trade. This is because of the increase in the volume of dollar available for foreign trade and investment,”
On the way out, Rewane called for the incorporation of a flexible or floating exchange rate system to allow the value of the naira to be determined by the invisible hand of demand and supply at the official market.
“Countries like Zambia and South Africa use the floating exchange rate system; this strategy could partly ex- plain the positive performance of their currencies. According to Bloomberg, the Zambian kwacha is the second best-performing currency globally in 2021, as it has appreciated by 27.04 per cent year-to-date,” he said
He equally called on Nigeria to complement shifting to a floating exchange rate system with increasing its forex supply.
“To achieve this, the productive side of the economy must improve. This improvement would increase the volume of goods and services available for domestic consumption, thereby reducing the country’s import costs which are a major drain on the external reserves. It would also increase the goods available for export to other countries and the inflow of revenue from export could be used to boost the external reserves and forex supply at the official forex market,” he said.