September 14, 2021/CSL Research
In recent weeks, severe pressure has been mounting on the exchange rate at the parallel market following the Central Bank of Nigeria’s (CBN) policy stance to discontinue the supply of FX to Bureau De Change Operators (BDCs). Consequently, the premium between the parallel market rate and the rate at the Investors & Exporters (I&E) window has continued to widen. Since the last Monetary Policy Committee (MPC) meeting when the decision was made, the Naira at the parallel market had depreciated by 8.2% to NGN550/US$, while the I&E window has remained relatively stable, currently at NGN412.75/US$. Thus, the parallel market premium had worsened to 33% from 23% when the policy was made on 27 July 2021.
While the CBN’s action seems justified based on the illicit financial behaviour of the BDC operators, we believe the timing of the ban (summer period: June–August) is inopportune. The summer period is characterized by pent–up FX demand to meet personal travels and educational needs. Though the apex bank redirected the FX supply previously meant for the BDCs to commercial banks, restrictions on FX demand limit placed by the banks on customers have not changed and stringent requirements to access FX from the banks can be discouraging for some. As such, customers have resorted to getting FX from the parallel market, pushing exchange rates to new levels. Besides, with the current situation, inflows from the Naira 4 Dollar scheme aimed at boosting liquidity at the parallel market may not have a far–reaching impact. Also, the inability of FPIs to get FX for repatriation has stalled foreign portfolio inflows, a major source of dollars into the economy.
In our view, we understand that the policy’s aim may be to trail all FX claims within the market, but this has not helped to ease FX demand pressures. In 2016, when the CBN took a similar action, it yielded limited results, as the parallel market premium was estimated at 61% as of year–end. That said, we expect liquidity from the planned Eurobond issuance of US$3.0bn and Special Drawing Rights (SDR) of US$3.4bn to increase FX liquidity. Thus, we do not expect a devaluation this year.