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CBN Floats the Naira and the Interbank FX Rate Takes a Dive

Dear Speculators,

It is no longer news that CBN has liberalized the interbank foreign exchange market in Nigeria. This new fx policy will allow exchange rate for bank to bank transactions to be determined freely by market forces as against the previous fixed rate of N199. The CBN has also permitted foreign currency deposits in deposit money banks and discontinued the sale of foreign currencies to Bureau de Change in Nigeria. CBN has also promised to intervene periodically and in unpredictable fashion to clear up backlogs of foreign exchange demands whenever the need arises. Since Nigeria has still not devalued her currency, CBN intervention in this market may present an arbitrage opportunity for the primary dealers. In other words, any day could be Christmas for the banks.

Obviously, the Central Bank now believes that the amount of dollars and other foreign currencies in circulation can provide much needed liquidity to satisfy the country's fx demands, thereby bringing certainty and stability to the forex market and the financial system as a whole. In a situation where the dollar deposits outweighs the demand, the naira will gain value in the interbank fx market and vice versa. The market opened at N280/$1 and CBN expects the naira to strengthen all the way to N225/$1 by June 2017. The odds of a stronger naira in the long term is historically not in our favour. Whether or not this is possible depends not only on CBN monetary  policies but also the economic prospects of the nation, foreign direct investments, the import levels and the crude oil price.

As investors begin to chase after normality once again in the fx market, they may well be chasing shadows. The 41 items still remain banned from the official import list, Nigeria has still not devalued the naira, Bureau-de-Change still remains the best option for acquiring dollars for most businesses and investors and the foreign external reserves is still not showing any sign of recovery, limiting the ability of the CBN to intervene. A potential downside of this policy is the artificial scarcity of dollars by the banks in order to push up the interbank exchange rate and reap abnormal returns. These banks may well be a source of foreign currency for the BDCs since the CBN has left them for dead if CBN places lax regulatory measures.

A devaluation of the naira and reassessment of the banned items will not only increase the naira revenue of the government from oil exports and import duties but will also provide a smoother transition from import dependency of these products to local production to satisfy domestic demand and potentially add to exports.

Although this new fx policy is a smart attempt to clean up the mess that they (CBN) themselves created, it fails to address the root causes of the dollar crisis. Eventually as the CBN continues to rethink some of its failed policies, we only hope that the solutions it provides are long-lasting and economically responsible.

PS: We believe that the greenback may trade as high as N500/$1 within the next 5 years and N1000/$1 within the next 10 years if the economic fundamentals remain the same or changes slightly over the time period.

Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
+2348137532722
emekaucheaga@gmail.com

Comments

  1. Unknown29 June 2016 at 16:27

    Beatiful piece of message Mr Ucheaga. I belive the achievement of 1 doller to 1 naira is far 4rm achievable with the activites of bureau de change, and also in nigeria the strenght of the naira can not be left to the invisible forces of demand and supply as the country largly focuses on imports for all (not some) of its economic need. So until this Economic turbulances which i will call it is tackle with devaluation of the naira as you rightly said, also govt supervised investment on agriculture and manufaruring sectors. Your predicted exchage rates will come to play in the next 5 to 10 yrs roughly

    ReplyDelete
  2. Emeka Ucheaga Advisory1 July 2016 at 07:52

    Thank you David Nzekwe

    ReplyDelete

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