“In summary MPC voted to introduce greater flexibility in the inter-bank foreign exchange market structure and to retain a small window for critical transactions,” said Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN) at the end of the Monetary Policy Committee meeting which was attended by 9 out of its 12 members, and resolved that it was going to allow the naira float freely at the inter-bank market.
Uncertainty surrounds trade on the Nigerian currency since the announcement.
Analysts have called this a semi-float since the Central Bank of Nigeria still plans on holding on to the official exchange rate of N197 per US dollar for funding “critical transactions.”
Naira weakened to 360 against the dollar on the parallel market on Thursday, from 342 a dollar last week, but Nigeria’s central bank told commercial banks to fund their naira accounts and submit bids for dollars on Thursday at 197.
Naira at the Parallel Market
NAIRA DOLLAR POUND EURO
(NGN) (USD) (GBP) (EUR)
Date BUY / SELL BUY / SELL BUY / SELL
26/05/16 345/350 494/497 383/387
25/05/16 345/350 490/495 382/386
24/05/16 342/346 490/495 382/387
23/05/16 340/345 487/492 380/385
20/05/16 342/346 484/489 385/390 Source Abokifx
On Tuesday, the central bank said it would adopt a flexible exchange rate policy, a shift from a peg for the naira seen as overvalued, which had hampered investment. The bank has only said it will give guidance within days
But according to a Senior Research Fellow at Centre for the Study of the Economies of Africa, Dr. Solomon Olakojo, allowing the Naira to float freely means that the government is leaving the forces of demand and supply to determine the foreign exchange rate.
This means that the more people demand for the Dollar, the more they would have to pay for it in Naira.
For instance, during resumption of schools abroad, Nigerian parents with children in school abroad will demand for dollars thereby leading to an increase in the exchange rate of a dollar to the Naira. During this period banks will then set their own exchange rate based on the demand in order to scare certain people away and sell to those willing to buy at a higher rate.
Following this announcement, Nigerians will not be able to buy a dollar at the CBN rate of 197. Therefore, people who want to make payments for school fees, business, tourism, medicals, holiday and other bills will not be able to buy at 197. They are now left at the mercy of the inter-bank market determined rates.
Banks, importers and individuals who also engage in round tripping or arbitrage (buying funds from the Central Bank of Nigeria’s (CBN) official market at low rate and resell in the parallel market at higher rates) – will not be able to do so anymore.
It is still unclear whether this move will work since Nigeria does not have the operational framework in place to ensure that it achieves the desired result. There is no significant inflow of the dollar to meet about 70 percent of the demand.
In view of this, Nigerians cannot bet on the dollar dropping below N300 anytime soon.
“We are waiting for clarity on the new policy and until the central bank comes up with modalities for the flexible foreign exchange market, the market will be trading cautiously,” one dealer said.