The naira exchange rate at the Investors and Exporters (I&E) window – the official forex market – dropped below the parallel market rate for the first time in decades on Monday. The naira lost ₦107 to close at ₦770/$1 at the I&E window, compared to ₦757/$1 at the parallel market.
The depreciation came after a sharp appreciation on Friday, when the naira closed at ₦663/$1 at the I&E window. The sudden reversal was driven by a shortage of dollar supply to the market and a surge in demand from manufacturers who could not access forex for items not valid for forex.
The Central Bank of Nigeria (CBN) had unified exchange rates into the I&E window last Wednesday, allowing market forces to determine the exchange rate. The move was aimed at increasing transparency, reducing misalignment and transaction costs, and boosting investor confidence.
However, some analysts said the low closing rate on Friday attracted more forex buyers who wanted to get dollars at cheaper rates to the I&E window. They also said the market needed more time to adjust to the new exchange rate framework and address issues of market structure, access and supply.
Dr. Ayo Teribe, Managing Director of Economic Associates, said the Bureau De Change (BDC)/ parallel market rate was a reliable indicator of market realities and was stable. He said he expected the rates to strengthen across all windows before the end of this week.
“The volatile price correction in the I&E rate should trigger an equally strong reduction in demand plus an increase in supply in that window. That would make the market settle back towards equilibrium in the next few days. I expect the unified rate to move towards ₦600/$ or stronger in the next week or so,” Teribe said.
Bismarck Rewane, Managing Director of Financial Derivatives Company Limited, noted that the CBN had also relaxed the domiciliary account restrictions, easing limits on cash deposits and withdrawals. He said this led to an instant appreciation of the naira at the parallel market by 0.53 per cent to ₦757/$ on Monday.
“This is good news for traders who source dollars mainly at the parallel market. With this development, it is likely that imported inflation, which is a function of the exchange rate, begins to taper,” he said.
Rewane said exchange rate management went beyond exchange rate unification and must effectively dismantle forex rationing, administrative controls, and import restrictions. He quoted former US President Barack Obama as saying: “Africa doesn’t need strongmen, it needs strong institutions.”
Richard Obire, former Executive Director at Keystone Bank Limited, said Friday’s rate closing at the I&E window may have encouraged more buyers seeking cheaper rates to that segment of the market. He said this may not have been matched by increased supply so the price responded accordingly.
“I suspect the average price on Friday has encouraged more buyers to come into the market. This may not have been matched by increased supply so the price will respond accordingly. This confirms the point that we need to see a reasonable period of trading to see where the market will settle,” he said.
Dr. Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria (ABCON), said all eligible forex demands were now queuing at the I&E window in the short run hence the high transaction traffic there. He said this was not new as there were times when the official exchange rate was higher than the parallel market rates in China.
“The interplay of supply and demand forces and the concept of a willing buyer and a willing seller will eventually lead to stable market clearance rates as events unfold,” he said.
Gwadabe advised the CBN to ensure liquidity in the retail end of the market by de-monopolising diaspora remittances and strengthening collaboration with BDCs.
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