Fitch applauds new forex policy, worries about implementation

Fitch Ratings agency has welcomed Nigeria’s planned shift to a more flexible foreign-exchange regime, saying that it could aid the country’s adjustment to lower oil prices and support growth, although implementation may present challenges.

“The change of policy is consistent with our view that the CBN would struggle to defend the naira indefinitely. But a backlog of unmet dollar demand (estimates range from USD4bn to USD9bn) has built up and any inability to clear a significant portion of that backlog early in the transition would hinder the effectiveness of the new framework,” the agency said in a report posted on its website over the weekend.

It added that establishing the new framework’s credibility will be key to its effectiveness in attracting portfolio flows and Foreign Direct Investment (FDI) to make up for lower oil export receipts.

The Central Bank of Nigeria (CBN) last week issued revised guidelines for a single, “market-driven” inter-bank foreign exchange (FX) market, open to authorised dealers and other entities.

It recalled that the CBN’s previous policy of restricting access to the official FX market and supporting the naira, rather than risk the inflationary impact of devaluation, has been negative for Nigeria’s sovereign credit profile.

The agency said defending the naira has lowered reserves and increased external vulnerabilities, while a shortage of hard currency has weighed on the non-oil

The CBN will introduce a new non-deliverable forward to try to limit exchange-rate volatility under the new system, by moving some of the dollar demand to the futures market and away from the spot market. Even so, the CBN will probably have to deploy a large portion of its international reserves during the first week(s) of implementation.

The CBN Fitch says, also reserves the right to intervene by buying and selling FX to smooth market movements, although it has made no specific announcements about trading bands or break points that might lead to intervention.

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