Official-parallel exchange rates remain wide, operators explain

The official and parallel market exchange rates for the naira and other currencies, especially the dollar, have sustained a wide gap, despite adjustments in the intervention rate by the regulator.

While the naira recorded slight movements at the interbank market last week, riding on the back of adjusted intervention rate by the Central Bank of Nigeria (CBN), the parallel segment remained at N225 per dollar.

Besides, analysts are of the opinion that the current N28.02 spread between interbank and parallel rates, as well as the current pricing of the naira at forward market (six month forward: N226.00/$) suggests a high likelihood of adjustment in interbank pricing if administrative curbs on trading are removed.

For example, on Monday, the naira traded at N199.10/$, appreciated by two kobo on Tuesday to N199.08/$ after CBN reduced its intervention rate by two kobo to N196.98/$, a development that was sustained till the end of the week at the official market.

However, at the Bureau De Change (BDC) segment, the naira at the start of the week, though appreciated by N2 at N224/$, however, bowed to increased pressures, as it lost N1 out of the N2 earlier gained, settling at N225/$.

Meanwhile, BDC operators said they have written the CBN Governor, Godwin Emefiele, on the factors responsible for the sudden rise in the parallel market exchange rate from N212 to N224 per dollar within the last three weeks.

The operators, represented by Alhaji Aminu Gwadabe, in a statement, said: “The spiral hike in the black market rate from an average of N212/$ to 224/$ was as a result of the activities of the illegal market operators; openness of the Nigerian economy; numerous and porous borders/airports; and the International Monetary Fund/JPMorgan’s threat to our policy formulation.
“Huge patronage of the black market by blue chip companies; increased protest by certain stakeholders/operators on the recent CBN policies; obsolete and lack of policy linkages/harmonisation of operational guidelines for operators by the various regulators; and lack of effective supervision and monitoring of the foreign exchange market by regulators.”

But analysts at Afrinvest Securities Limited said that given CBN’s position that the naira is appropriately priced at current official rate, there is no expectation of significant re-adjustment in its intervention rate or administrative management of foreign exchange.

Demand restrictive policies have already resulted in lower utilisation of foreign exchange by banks and stabilisation of external reserves.

According to CBN report, foreign exchange utilisation by banks for valid transactions fell by 30.1% in second quarter of 2015 to $9.9 billion from $14.2 billion in first quarter of 2015, while external reserves has stabilised within the $30 billion region in the past two months.
“This has however, come at the expenses of slower economic activity and capital inflows. The CBN Governor had hinted at the Financial Times Africa Summit earlier this month that the bank considers the naira appropriately priced and would continue to control imports, a position that has also further been reinforced by the fiscal authorities.

With oil prices not expected to recover before 2017, CBN’s resolve to aggressively defend the naira will be tested in months to come.
“Faster implementation of structural reforms to diversify fiscal revenue and external reserves, as well as reduced dependency on imports for petroleum product and other manufactured products imports will greatly enhance the capacity of the CBN to maintain the foreign exchange balance,” the analysts said.

“We believe the naira will continue to trade at current levels, but in a broader view, as the Yuletide season approaches, pressures on the naira are expected to increase as demand for foreign exchange to fulfill monetary obligations intensifies,” the analysts said.