Naira appreciates as IMF charges CBN to Adopt Market Clearing FX Rate

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Naira gains in the official foreign exchange window in the just concluded week as International Monetary Fund, IMF, asks the Central Bank of Nigeria to adopt a market-clearing foreign exchange rate to drive dollar inflow into the dollar-starved economy.

Devaluation of the Nigerian local currency, naira, is the last thing government is willing to do amidst a persistent increase in the poverty rate in the country but forces of demand and supply continued to raise exchange rates across various windows.

Battling with dollar shortage, Central Bank adopted multi-tiered exchange rates management to keep the dollar strong but the apex bank has failed, largely, when considering numbers of devaluation naira has faced.

Mounting pressures on the local currency has kept people poor, as the number of people living the poverty index has widened with high inflation and devaluation eroding purchasing power.

Since 2015 when naira was officially quoted at N197 a dollar, Naira has suffered mishaps in the currencies markets as the local currency continues to find fresh spot rates in the Nigerian Autonomous Foreign Exchange Fixing (NAFEX).

The Nigerian local currency, naira, gains across various foreign exchange rates windows in the week after the International Monetary Fund, IMF, tasks the Central Bank on unified market-clearing exchange rate.

In its latest mission into Nigeria, IMF said continued reliance on administrative measures to address persistent foreign exchange shortages is negatively impacting confidence.

Foreign investors have remained sceptical of Nigeria’s exchange rate policy, causing doubts about the ability to repatriate funds at exits points. Even the MSCI Index had warned about a possible downgrade of the Nigerian index citing the inability to get the dollar out of the country as CBN implements capital control measures.

This resulted in a forced stay back for some investors while dollars backlog build up. Meanwhile, indications have emerged that CBN has started to clear the FX backlogs.

According to Cordros Capital, the CBN began selling $25.00 million to the foreign portfolios investors (FPIs) at the spot and forward market at the rate of N444.00 and N453.00 per dollar respectively.

The investment firm explained that this suggests the CBN has commenced clearing the FX demand backlogs given the substantial inflows from IMF’s SDR and the Eurobond issuance.

“Without urgent fiscal and exchange rate reforms, the medium-term outlook faces sub-par growth”, IMF said in a report on the Nigerian economy released on Friday.

Despite four consecutive growth recorded in the past quarters, IMF said manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges.

Dollar shortage in the economy has lifted average production costs and driven upward prices adjustments across sectors. In its recent release earnings scorecard, MultiChoice, owners of DSTV said it gets cash from Nigerian mostly at parallel market rates.

The company’s revelation signals that other foreign own businesses are facing similar pressures. Large numbers of fast consumer goods companies listed on the Nigerian Exchange recorded foreign exchange losses persistent due to unfavourable foreign exchange rates in Nigeria.

IMF believes that a further move toward a market-clearing exchange rate will help build foreign exchange buffers through higher capital inflows.

Dollars inflows from foreign investors accounted for 53.8% of total transactions at the Investors and Exporters window before the pandemic, according to analysts.

The multilateral lender told policymakers in Nigeria that despite the recent special drawing rights SDR allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels.

“Slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows”.

With an external position that is assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies.

Meanwhile, IMF assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate.

Nigeria’s FX reserve declined for the third consecutive week as the gross reserves closed lower by $102.58 million week on week to $41.41 billion.

Meanwhile, the naira appreciated by 0.2% this week to N414.40 a dollar at the Investors and Exporters foreign exchange window (IEW) but depreciated by 2.5% to N554.00/$ at the parallel market.

At the investors’ window, total turnover declined by 20.8% from the beginning of the week to $589.96 million, with trades consummated within the N386.00 – 453.75/$ band.

In the Forwards market, the 1-month contract gained 0.1% to N415.57, 3-month gained +0.2% to N421.02, 6-month strengthened by 0.2% to N430.06 and 1-year contracts gained +0.1% to N447.00, reflecting appreciations of the naira to the greenback.

Although the CBN has enough liquidity to support the market in the near term, Cordros Capital analysts think foreign inflows is paramount for sustained FX liquidity over the medium term given their level of importance in the Investors and Exporters window.

Dollars inflows from foreign investors accounted for 53.8% of total transactions at the Investors and Exporters window before the pandemic, according to analysts.

Hence, Cordros Capital analysts think further adjustments in the FX rate peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.

Accordingly, analysts maintained the expectation that the CBN will devalue naira at the Investors and Exporters FX window over the short-to-medium term.