The Central Bank of Nigeria (CBN) has devalued the naira to N410.25 to dollar.
The devaluation of the local currency was confirmed by the adoption of the Nigerian Autonomous Foreign Exchange Rate (NAFEX), also known as the Investor and Exporter (I&E) forex window rate of N410.25 as its official exchange rate to the dollar.
The apex bank had nearly two weeks ago, removed the N379 to dollar exchange rate, the previous official rate from its website.
The naira was yesterday exchanging at N487 to dollar at the parallel market.
CBN Governor, Godwin Emefiele said Nigeria, like other emerging market countries and countries reliant on oil exports, the decline in crude oil earnings as well as the retreat by foreign portfolio investors significantly affected the supply of foreign exchange to Nigeria.
Speaking at the 55th Annual Bankers’ Dinner in Lagos, the CBN boss said the need to adjust for the decrease in supply of foreign exchange led to the depreciation of the naira.
“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,” he said.
Emefiele explained that due to the unprecedented nature of the shock, 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.
This, he said, was in line with international best practices in countries where managed float arrangements are in operation.
“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.
The CBN had, in April 2017, established the I&E forex window as part of efforts to deepen the foreign exchange market and accommodate all forex obligations.
The purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.
In the note titled: ‘No more official rate – act of Omission or Commission?’, an economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the erasure of the official exchange rate from the CBN website for over 11 days is being interpreted by the markets as a move towards 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 added.
According to Rewane, the gap between the parallel rate (N486/$) and the official rate (N412/$) has declined from N100 early this year to N74 today.
In addition to this, the path to full convertibility is typically preceded by the move from an auction system to an interbank market.
He said the move will help Nigeria meet some conditions precedent to its proposed $3 billion Eurobond issue and accessing a $1.5 billion loan from the World Bank.
Also, the IMF has consistently insisted that restrictions on access to forex for certain categories of goods, and multiple exchange rates create distortions in both private and public sectors decision making. They discourage long-term investment, encourage smuggling and provide avenues for corruption.
The Fund suggested removal of foreign exchange restrictions, and a full exchange rate unification, in line with the authorities’ Economic Recovery and Growth Plan (ERGP), will help keep the parallel market premium low in a more sustained manner.
It therefore called for unified exchange rate for the naira to promote growth and attractive foreign capital.
According to the IMF, foreign exchange backlog and shortages are intensifying Balance of Payment (BoP) pressures insisting that exchange rate unification was imperative to reduce BoP risks. It said that fiscal deficit will stay elevated in the medium term, while additional domestic revenue mobilisation is required to reduce fiscal risks.