Saying bye to forex control

At the Central Bank’s monetary policy committee meeting on 7th July, Lamido Sanusi, the Central Bank governor said that controls on foreign exchange transactions, imposed when his predecessor Charles Soludo was in office, would be removed.

According to Mr Sanusi, “the MPC noted with satisfaction that recent measures to stabilise the naira exchange rate have posted some positive outcomes. The naira exchange rate has stabilised at the RDAS in recent weeks while in the other segments, the rates have appreciated, thereby narrowing the arbitrage opportunities.”

“However, the premium over the RDAS rate has remained significant. The present situation offers an opportunity to further narrow the gap between the two rates by measures aimed at further liberalising the inter-bank foreign exchange market” he said.

Convergence

In an chat with NEXT, Bismarck Rewane, managing director of Financial Derivatives, an economics consultancy, said, “The Central Bank governor has said that he wants an exchange rate determined by market forces and that he wants convergence. Convergence does not mean that the exchange rate will not depreciate if that is what market forces determine. You can have a $1 to N1 exchange rate, but your reserves will be finished.”

“In my view, we’re likely to have more convergence between the official and the black market exchange rate over time. The demand is from the banks and supply is from oil. Given all the factors at play, we are likely to see the exchange rate depreciate to around N160 to N165 to $1 in two or three months, for both official and black market rates,” Mr Rewane added.

Demand and Supply of forex

Implementation of the new policies has helped contribute to an increase in demand for dollars.

In a daily auction in mid June when the forex controls were underway, the regulator sold $70.06 million at an auction as against $72.98 million demanded.

On the Wednesday of the week following the lifting of forex controls, demand for dollars by banks at the Central Bank auction was $435.42 million. The Central Bank did not have enough dollars to meet demand. On that day, the Central Bank sold $200 million at 146.30 naira a dollar.

Strength of the naira

According to Mr. Rewane, there is no indication that the naira would appreciate in the nearest future. “We do not expect further appreciation in the naira. The currency has reached a point of inflexion. Most of the gains in the naira are attributed to the dollar weakness which has depreciated against the basket of currencies by over 10percent.

The naira is predicted to further depreciate in the nearest future. According to the Financial Derivatives report, there will be “minor naira depreciation at the official market, which the CBN is expected to support by periodic intervention. The parallel market is expected to become inactive, with convergence between the rates at market segments narrowing to about 4 percent”. The parallel market will depreciate towards N160 in the near term.”