Current FX regime unsustainable beyond short term – Analysts


By Ayobami Adedinni

Analysts at Business Monitor International (BMI) Research have said that the nation’s current multiple-rate Foreign Exchange regime is unsustainable beyond the short term and will likely be consolidated into a single – more flexible – rate in 2018.

It stated this in its Africa Monitor West Africa September Report 2017 stressing that rising oil receipts and greater liquidity in the economy following the introduction of a new, tradeable, exchange rate in April, will see the economy and the banking sector improve.

According to the report, the Central Bank of Nigeria (CBN) will continue to tightly manage the naira through 2017 as the country’s improving fundamentals indicate downside pressure on the currency is beginning to decline.

The report stated that both the CBN and the Federal government have failed to provide investors with any degree of policy clarity on the country’s exchange rate regime, leading to levels of uncertainty that have weighed on investor sentiment towards the oil-rich nation over the past two years. The introduction of multiple new exchange rates over 2017 has only exacerbated this uncertainty.

It said, “Improving macroeconomic fundamentals and political pressure lead us to expect that Nigeria’s central bank will not make any substantial devaluation to the peg on the naira’s official exchange rate in 2017 However, with the country’s fundamentals showing signs of recovery after its 2016 recession, we believe pressure to devalue or even float the naira is slowly beginning to decline.

“Although the recovery in crude prices after collapsing in H214 has been weak over H117, production increased dramatically in Q2 since declining in 2016, following a series of attacks on pipelines carried out by local militia groups. Increasing production this year has facilitated an uptick in crude exports, resulting in a much-needed boost to the supply of hard currency in the country,” it said.

It stated that this has been reflected in the uptick in foreign reserves recorded over 2017 and the strength of the NAFEX window (the most free floating of Nigeria’s various exchange rates).

It said, “Finally, statements from various members of the central bank’s monetary policy committee have not alluded to any desire to review the peg, and despite his questionable health, President Muhammadu Buhari holds enough power in pegging the rate around N324/Dollar at end-2017″.

In the past, the CBN has shown high levels of willingness and ability to extend emergency lines of credit to banks, suggesting a robust sovereign backstop for the industry. In 2008-2009, the global economic crisis triggered a banking crisis in Nigeria and the CBN took forceful measures to support the industry, injecting NGN620bn of liquidity, putting out a blanket guarantee on deposits and foreign credit lines and replacing management in eight banks. The Asset Management Corporation of Nigeria (AMCON) was established as a vehicle to purchase NPLs from banks.

However, the Nigerian government and the CBN have increasingly limited capacity to support lenders in the event of a financial crisis.


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