Naira-for-dollar policy to reduce gap between parallel, I&E exchange rates —Experts

WITH the premium between the parallel market and the Investors and Exporters Foreign Exchange  (IEFX) rate estimated at N71, the Naira-for-Dollar policy of the Central Bank of Nigeria (CBN) is likely to reduce the gap, say experts at Financial Derivatives Company (FDC) Limited.

Already, Naira fell against the U.S. dollar at the Investors & Exporters (I&E) window of the foreign exchange market on Friday, data from the FMDQ Security Exchange where forex is officially traded showed.

Also, the currency weakened at the parallel market. Naira closed at N410.00 at the trading session of the I&E window on Friday, a N1.00 or 0.25 per cent devaluation from N409.00 it closed at the previous session on Thursday.

The domestic currency experienced an intraday high of N390.00 and a low of N412.20, before closing at N410.00 on Friday.

The depreciation of the local unit, according to dealers, occurred as turnover dipped by 66.75 per cent, with $63.88 million recorded as against the $192.11 million posted on Thursday.

Also, at the unofficial market, data posted on abokiFX.com, a website that collates parallel market rates in Lagos, showed the domestic currency closed at N485.00, a N3.00 or 0.62 per cent depreciation from N482, which it exchanged hands with the greenback currency on Thursday.

By this, the spread between the unofficial market and the I&E window exchange rate is at N75.00, which translates to a gap of 18.30 per cent.

The CBN’s official rate on Friday was still N379 per dollar.

Finance experts at FDC in an emailed note said the Naira-for-Dollar policy will also reduce the cost burden of remitting funds to Nigeria by Nigerians in the diaspora.

“As forex supply increases, we expect demand pressures to ease with a possible naira appreciation especially at the parallel market,” the firm stated.

According to FDC, year-to-date, the Naira has lost 2.55 per cent at the parallel market (currently trading at N482/$).

In a bid to sustain the increase in diaspora remittances into the country, the Central Bank of Nigeria (CBN) introduced a ‘Naira-4-Dollar’ promo.

The promo, which takes effect from March 8, 2021, and ends on May 8, 2021, offers recipients of diaspora remittances N5 for every $1 received as remittance inflow through licensed International Money Transfer Operators (IMTOs).

Like Bangladesh and Pakistan, the CBN designed this promo to increase awareness and diaspora remittances inflows into the country through the IMTOs

According to the apex bank, it should reduce the cost of remittances from the current cut-throat rates.

But FDC observed that in nominal terms, the exchange rate is unchanged but in reality, it is an effective one per cent depreciation of the currency.

“This initiative is expected to increase diaspora remittances flow into the country, boosting forex supply. This will also stem the depletion in the gross external reserves level (currently at $34.88 billion as of March 4),” they said

Nigeria was the 7th largest recipient of remittances in 2018 behind India, China, Mexico, Philippines, France and Egypt. However, the World Bank projected a $2 billion drop in diaspora remittances into Nigeria to $21.7 billion in 2020 from $23.8 billion in 2019, due to the impact of the COVID-19 pandemic and the attendant economic crisis.

However, FDC fears that a potential risk to this development is that there will be attempts to roundtrip and arbitrage the system.

In addition, the current pandemic and furloughs could cut deep into the inflows. This is because foreign remittance is largely dependent on the economic conditions in the global economy, particularly the originating countries.

According to PWC, the bulk of Nigeria’s remittances flow came from the US, UK, Cameroon, Italy, Ghana, Spain, Germany, Benin Republic, Ireland and Canada in 2017.

It is however optimistic that all these countries may recover from the COVID-induced recession in 2021 with an average growth rate of 4.3 per cent.

They said more than anything else, efforts should be geared towards boosting forex inflows by scaling up non-oil exports.

This requires sector-specific policy initiatives to attract investors and develop the non-oil sector. The FG is proposing new taxes on petroleum products, telecoms and non-alcoholic beverages. While this will boost government revenue, it poses a significant threat to business growth, it noted.

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