When it comes to the Foreign Exchange markets and the determination of the exchange rate in Nigeria, the Central Bank of Nigeria suffers from an illusion of control. The CBN believes that it is the sole determinant of the fortunes of the naira, with the ability to fix the exchange rate at any level desired. The CBN’s obsession with fixing the exchange rate comes from the idea that managing the exchange rate is critical to achieving its inflation target.
Businesses and investors lose confidence in the official FX markets since it cannot meet their FX needs and the parallel market assumes prominence. The CBN only controls the regulated official market, where it can compel certain behaviour and exchange rate by its regulated dealers through the threat of sanctions.
These brokers source FX from exporters and other autonomous sources outside the CBN’s framework to meet FX demand. Majority already own Bureau De Change licences but operate outside the framework guiding BDCs for wholesale transactions. The BDCs are only a segment of the wider parallel market, but because they are formally regulated and their exchange rates are market determined, they are easy scapegoats. When the exchange rate premium in the parallel market widens, BDCs come under heavy scrutiny and they are ostracised from the official FX market.
As the CBN moves to resume sales to BDCs, are they doing this with the expectation that this would unify the official and parallel markets and slow the depreciation in the latter segment? Does the CBN have the firepower to fix exchange rates? While the CBN is getting dollar supply through a NNPCL loan of $3bn from the Afrexim Bank, its main sources of dollar inflow – exports and foreign investment – remain weak. With revelations from JP Morgan that Nigeria’s Net External Reserves at $3.
Despite many failures, the CBN has not taken notice of the fact that it is just another player in the FX market. It is only when external reserves are huge that it can shape the direction of the exchange rate. Ignoring this fact is why the recent reform to make exchange rates more market reflective has not worked.
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Source: GuardianNigeria - 🏆 1. / 94 Read more »
Source: GuardianNigeria - 🏆 1. / 94 Read more »
Source: GuardianNigeria - 🏆 1. / 94 Read more »