How IMF, FG disagreement impacted Naira —FDC

THERE are indications that the exchange rate at the Investor and Exporter window (IEFX rate) crossed the N400/$ threshold again after a one-day spell on December 31, 2020, according to a report by the Financial Derivatives Company (FDC) Limited.

This followed the International Monetary Fund’s differing positions with the Federal Government through the Central Bank of Nigeria (CBN).

The IMF had on Monday last week  urged the central bank to reduce its interventions in the spot market and allow for greater adjustment in the exchange rate to eliminate the premium on the black market, where the naira trades more freely, to prevent a backlog building up, a position the apex bank seems to be reluctant about.

In the last one week, the IEFX rate has been gradually shifting towards N400 after hovering around N393-N394/$ for almost five weeks. The average turnover at this window has declined by 0.8 per cent to $56.85 million in the first eight trading days in February, compared to $57.31 million in January. Meanwhile, the parallel market appears stuck at N478-N480/$.

Specifically, the Nigerian naira according to currency dealers dropped 1.75 per cent  on Friday to a record low of N410.50 per dollar on the spot market, as traders cited dollar scarcity and a lack of central bank intervention on the market.

The naira, which has been weakening on the over-the-counter spot and derivatives markets, dropped to a low of N403.29 on Thursday after reaching record intra-day lows since January.

The IMF released its Article IV review on Nigeria reiterating its position on the need for another devaluation of the naira, which it said is overvalued by at least 18 per cent and by as much as 27 per cent. According to the IMF, this would ease external imbalances and clear the dollar backlog.

The federal government on the other hand is of the view that another naira devaluation will further stoke inflationary pressures. Bear in mind that in 2020, the CBN adjusted the official exchange rate twice from N306/$ to N360/$ and then N380/$.

According to FDC, It is clear that the CBN is more inclined to address the issue of price and exchange rate stability with the use of more orthodox means and controls.

“The plethora of circulars released by the CBN ranging from the repatriation of export proceeds to diaspora remittances and more recently cryptocurrency transactions, may be rubbing off negatively on international investors who are uncertain of the policy environment in the country and what circular may be released next. Foreign portfolio inflows into Nigeria have declined sharply partly because of Covid-19 but maybe more importantly because of policy ambiguity.

“We expect the CBN to reduce its forex rationing especially with oil prices trading at $60pb. Also, with money market interest rates trading above 10 per cent for the first time in about five months, it means that liquidity in the banking system is reducing and the demand for dollars can be curtailed,” it stated in a note to clients.

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