The Central Bank of Nigeria (CBN) took a major step towards full exchange rate unification Tuesday after uploading the more market-reflective NAFEX rate of N410.25 per US Dollar on its website. A full unification entails closing the gap between the now sole official rate and the parallel market rate.
Analysts expect the CBN to now focus on clearing the dollar demand backlog, reduce the gap between both rates, which will give a much-needed boost to an economy that has been starved of dollars and bereft of investor confidence. The Naira traded at N486 per dollar in the parallel market Tuesday, according to data collated by Abokifx, implying a gap of N76 between the now official NAFEX rate and the parallel market rate.
“Publishing the I&E window rate on its website is a significant step by the CBN towards the long overdue full unification of the exchange rate,” noted Omotola Abimbola, an analyst at Lagos-based investment bank, Chapel Hill Denham. “The final pieces of the puzzle will be to allow more flexibility of the I&E rate and work towards narrowing the gap that still exists between the official rate and parallel market rate,” Abimbola said.
Although the government had since March adopted the Investors and Exporters window rate (also known as the NAFEX rate) for government transactions, the CBN retained the old N379 per Dollar official rate on its website, which created some confusion for investors. The CBN pulled down the rate two weeks ago and has followed that action up by officially adopting the I&E window rate on its website where the Naira is quoted at a weaker rate of N410.25 per Dollar.
The latest move leaves Nigeria with only two rates, the NAFEX rate and the parallel market rate. That is down from almost five different rates as at the beginning of 2020, which is proof of the progress Nigeria has made to ditch a multiple exchange rate practice that has distorted the market and frustrated foreign investors.
“It is a big step towards full unification, which is positive for the economy,” said Wale Okunrinboye, head of investment research at pension fund manager, Sigma Limited. Oil and gas firms must be heaving a sigh of relief as it means they now get a higher rate for their dollars even though government transactions were already being done at the I&E rate before now,” Okunrinboye stated.
The International Monetary Fund and the Presidential Economic Advisory Council hold the view that ditching the multiple exchange rate practice, which Nigeria started in 2016 in reaction to lower oil prices, will open up the economy to badly-needed investments. A full unification at a market reflective rate could reduce the amount Nigerians buy Dollars at the black market rate, which analysts say is overpriced.
It will also go some way in easing the dollar crunch in the country and ensure manufacturers have better access to dollars. Improved access to Dollars by manufacturers, which would help reduce their input costs. Foreign investors will also be following the CBN’s next move closely as it could improve Dollar liquidity and improve the ease at which they can invest in the country.