Has Nigeria finally accepted to devalue its currency – the naira – in spite of its initial hard stance against devaluation? This appears to be the case especially after the Central Bank of Nigeria, CBN, yesterday formally unveiled the much-awaited flexible foreign exchange policy.
The policy eliminates the official exchange rate for the naira, allowing the foreign exchange interbank trading window to be “purely market driven”.
The naira was officially pegged at 197 to the U.S. dollar but experts now agree that it will fall sharply in the coming days to between N280 – N300 to the dollar.
It is believed this will allow increased dollar supply, which will in turn help strengthen the country’s weak economy.
The CBN Governor, Mr. Godwin Emefiele, said in Abuja at the formal announcement Wednesday that the new framework would operate a single market through the interbank autonomous window, to be launched on Monday, with about 10 forex primary traders, to be appointed and notified by the bank tomorrow (Friday).
Each trader will have a minimum volume of $10 million.
“The Exchange Rate would be purely market driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book”, Emefiele said.
But the governor said the CBN will participate in the market through periodic interventions to either buy or sell FX as the need arises.
“To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis.
“The new Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange Primary Dealers (FXPD) Guidelines, which would also be released soon”.
According to the governor, the fall in oil revenue has led to a drastic decline in foreign reserves, from about US$42.8 billion in January 2014 to about US$26.7 billion as of June 10, 2016, equivalent to 60% within the period.
He also said the monthly foreign exchange earnings have fallen from about US$3.2 billion monthly to current levels of below a billion dollars per month during the same period.
Despite having fallen, the CBN governor said the foreign reserve is still robust and able to cover about five months of Nigeria’s imports as against the international benchmark of three months.
Domestic production of items restricted from the FX market is picking up nationwide, Emefiele added.
“The 41 items classified as ‘Not Valid for Foreign Exchange’ as detailed in a previous CBN circular shall remain inadmissible in the Nigerian FX market. Therefore, they would source from parallel market”, the CBN boss stated.