Nigeria begins transitioning to uniform exchange rate regime
The Central Bank of Nigeria (CBN) has taken step that indicates a collapse of the multiple exchange rate policy that determined the value of the naira and adopted a single exchange rate.
The country will now have a uniform rate for the official rate, bureau de change operators, importers and exporters amongst others.
This was contained in a circular signed by the Director, trade, and exchange department of the CBN, Ozoemena Nnaji, on the disbursement of the proceeds of the International Money Transfer Operator (IMTO).
According to the apex bank, IMTSOs will sell to banks at N376 per dollar, banks to CBN N377 per dollar, CBN to Bureau de change operators N378 per dollar, BDCs to end-users should not be more than N380 per dollar and the volume of sales for each market is $20 thousand per BDC.
Although this move has been seen as technically devaluing the naira the apex bank last week said in a release that “market fundamentals do not support Naira devaluation at this time.”
The naira has been under pressure after oil prices fell $30 per barrel, way below the government’s $57 target on which the 2020 budget was planned.
“Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments,” Bloomberg quoted a senior central bank official as saying, confirming the bank changed the rate at the window for foreign investors to N380 per dollar from N366 per dollar.
The Federal Government (FG) through the Petroleum Products Pricing Regulatory Agency (PPPRA) reduced the price of petrol for the first time since 2015 to ?125.0/litre from ?145.0/litre, effective March 19, 2020.
The new pricing template of the PPPRA assumes an implied exchange rate closer to the market rate of ?368/$1.00 at the Investors and Exporters (I&E) foreign exchange (FX) window rather than ?306.95/$1.00 at the official window.
Experts from Afrinvest West Africa Limited believe that this suggests the convergence of the various exchange rate windows, which is even more necessary to remove distortions due to the current FX pressures.
However, “we note that this is yet to be communicated officially by the CBN. As the current transactions at the official exchange rate are mostly government-related and daily sales to the interbank are low at $100,000 according to the IMF as at 2019, we believe there are more gains from the transition.
“This would help boost government oil receipts and lessen the pressure on FX reserves even if marginally,” the finance experts wrote in a note on Friday.
This is a big step forward if it means a convergence of all existing rates as it removes the opaqueness of Nigeria’s foreign exchange policy, Yvonne Mhango, sub-Sahara Africa economist at Renaissance Capital said by email.
The central bank has also allowed the official rate, which was pegged at N307 to the dollar to weaken closer to the market rate. Government dollar earnings from oil will now be converted to naira at the higher rate, a huge boost to revenues which has been hit by lower crude prices.
Bloomberge quoted Ayodeji Ebo, managing director at Afrinvest Securities in Lagos as having said by phone that it will cushion the impact the lower crude price will have on government revenue as it will increase the naira revenue Nigeria will get from oil exports.
Before now, Nigeria operates a system of multiple exchange rates in a bid to control demand for dollars.
The system, which has been criticised by the International Monetary Fund, has kept the official rate at about N307 per dollar. It uses this to supply cheap foreign exchange to government departments and select companies, including fuel importers. It created an importers and exporters window in 2017, in which the naira was allowed to weaken after an economic contraction in 2016.