Nigeria Moves Closer to Single Exchange Rate

Nigeria took a step to unify its multiple exchange rates by allowing Banks to use a currency window for investors when quoting the Naira rather than the official rate. The Naira weakened on the interbank market.

FMDQ OTC Securities Exchange, the Lagos-based platform that oversees interbank trading, asked lenders this week to publish quotes reflecting trades in the Investors’ and Exporters’ FX Window, according to Ecobank Transnational Inc. and Access Bank Plc. The window was opened in late April in a bid to attract inflows to the dollar-starved nation.

The interbank rate weakened 14% to 366.04 per dollar as of 5:42 p.m. in Lagos, close to 367.08 for the so-called NAFEX rate, the daily fixing published by FMDQ for the Investors’ & Exporters’ FX window. Naira three-month forward contracts based on the official rate rose as much as 1.3% to 342 against the greenback, the highest level on a closing basis since June 6.

“FMDQ and traders reached agreement to try to move toward a single exchange rate,” Kunle Ezun, an Analyst at Ecobank in Lagos, said by phone. The idea is “to show the true reflection of the Naira in the market”. The I&E window in terms of transparency and price discovery seems to reflect where the Naira should trade. All Banks are now putting quotes at that rate.”

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 squeeze worsened, Nigeria opted for a system of multiple exchange rates rather than floating its currency like other crude producers such as Russia and Kazakhstan.

The change this week was made because Banks have been trading with each other mainly via the NAFEX market since its introduction, according to Bola Onadele, FMDQ’s chief executive. Banks “should quote where Naira is trading with integrity and transparency,” he said in a text message.

While the move will be welcomed by investors, who have long criticized the existence of several exchange rates, a full unification may still be some way off, according to Standard Chartered Plc. The Central Bank maintains an official rate as strong as 305 per dollar, which it uses to ensure fuel importers get cheap Dollars.

“It is probably a positive step toward greater transparency in the FX market,” said Samir Gadio, Head of Africa strategy at Standard Chartered in London. But “exchange rate unification across the board could imply higher fuel prices, or larger implicit subsidies, which will require national consensus. So it is not a straightforward step.”


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