Nigeria moves closer to efficient FX market but multiple rates linger
Nigeria hopes to move a step closer to an efficient foreign exchange (FX) market, with banks now publishing the investor-favoured NAFEX rate on their screens, but may still cling on to a multiple exchange rate system.
The change, initiated by market operator FMDQ Securities Exchange to improve liquidity, comes as banks already trade with one another mainly using the NAFEX rate created in April to allow investors trade the naira at rates determined by the market.
The naira was quoted at N367 per dollar as of 12pm Friday, at the Nigerian Autonomous Foreign Exchange (NAFEX) window.
The rate is the closest the naira has come to its market value since a dollar crisis caused by declining petrodollars, and has boosted investor confidence and sent stocks to a near 3-year high.
Stocks appear to have again cheered this latest move, with the main index rising 0.78 percent to 37,425.15 points on Friday, according to data tracked by BusinessDay.
“It’s a good development and the final piece for a perfect market,” Bismarck Rewane, CEO, Financial Derivatives Company, said of the shift by the banks to quote the NAFEX rate.
“Now the FX market has several buyers and sellers trading a homogenous product and there is perfect information. Before now, banks sold dollars at varying rates that became confusing to investors and didn’t engender transparency,” Rewane said, “But with this, we now have a perfect market that is likely to boost liquidity.”
The FMDQ asked lenders to publish quotes reflecting trades in the Investors’ and Exporters’ FX window, instead of the characteristic interbank rate that was quoted at N325 Friday, a move intended to elicit investor confidence and boost liquidity in the market.
“The interbank rate has just become more redundant,” said Ayodeji Ebo, CEO, Afrinvest Securities Limited, a financial advisory firm based in Lagos.
“The move by banks to quote the NAFEX rate is a pointer to the acceptability the rate enjoys in the investor community and it is a sign of improved dollar liquidity,” Ebo said in a phone interview.
The NAFEX market or Investors’ and Exporters’ window (I&E) was intended to improve dollar supply, and has handled about $4 billion since its introduction, according to data compiled by BusinessDay.
The Central Bank of Nigeria (CBN) hopes the move to allow banks quote the NAFEX rate will further narrow the spread between the official and black market rates by attracting more investment with higher transparency, traders said.
While the latest move signals improving dollar supply, which has soared following the introduction of the I&E window, a full unification of the multiple rates remains some way off, according to Ayo Akinwunmi, head of research at FSDH Merchant Bank.
“Given the structure of the economy, it may be difficult for CBN to stop the multiple exchange rate system because they need to subsidise fuel importers to keep a lid on inflation and to avoid sparking a social unrest from increased petrol prices,” Akinwunmi said.
“There is however no way we can sustain this system in the long term and the government may have to look at fully liberalising the downstream oil sector, but that day is not here yet,” Akinwunmi added.
Nigeria has faced dollar shortages since the price of oil, its main export crashed in 2014 and the central bank responded by tightening capital controls.
As the crunch got worse, Nigeria opted for a system of multiple exchange rates rather than floating its currency like other crude producers such as Russia and Kazakhstan.
The central bank maintains an official rate as strong as N305 per dollar, which it uses to ensure fuel importers get cheap dollars. On the official market, the naira closed at 305.55 Friday, the rate where the central bank has kept it through regular dollar sales since last August.
Nigeria had at least five exchange rates, which it has used to mask pressure on the naira.
The apex bank has been working to converge the rates through interventions, with the CBN governor, Godwin Emefiele, vowing to keep supply steady to ease a biting dollar crunch that is now fast dissipating.
In a signal of improved dollar availability, banks are boosting dollar-spending limits for payment cards denominated in local currency as much as tenfold.
Guaranty Trust Bank, the country’s biggest bank by market value, raised the maximum amount a holder of its naira Mastercard can spend abroad in a month to $1,000 from $100, in line with the relative improvement in FX liquidity in the market.
Ecobank Transnational has set a $1,000 per day limit from $100, while FCMB Group will start implementing its new spending limit of $500 per month this week, according to their officials.
The banks had cut or suspended foreign payments using naira cards in 2015 and 2016, as a decline in the price and output of oil, the country’s main export, caused a plunge in foreign income and prompted the Central Bank of Nigeria to introduce controls to reduce dollar demand.
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