The decision to implement a flexible foreign exchange policy has once again being described as one that would certainly have positive effect on the Naira in particular and the Nigerian economy in general.
Prominent financial analysts, who spoke to Independent, believed that the implementation of the policy at this period will bring back the lost glory and restored the country’s currency, the naira, back to its good old days.
Johnson Chukwu, the Chief Executive Officer of Cowry Asset Limited, said that the Naira has enjoyed some stability in all the market segments since the introduction of the new forex policy unlike when we had wide fluctuations in the parallel market.
“It should be emphasised that what business managers seek for is not necessarily a revaluation of the Naira, but exchange rate stability to enable them plan.
“For those expecting Naira to appreciate, this may be feasible in the medium to long-term when the country’s foreign exchange earnings improve and previously active but now dormant sources of foreign exchange inflows get reactivated, particularly Diaspora remittances, foreign portfolio investments and foreign direct investments and non-oil exports.
“The introduction of the flexible foreign exchange policy, which removed the peg of the Naira from an artificially overvalued rate of about N197/$ to a more market reflective spot rate of N280 – N282/$ has restored some stability, including the parallel segment where Naira is still trading at about N350 – N352/$, against fluctuations between N320/$ -N400/$.
“Also the new forex policy has eliminated some distortions in the economy by creating a fair playing field as against the previous arrangement where some people accessed forex at N197/$ while others sourced theirs from the parallel market at N380/$,” he said.
But, he said that readmitting BDCs is hinged on the desire to create multiple sales outlets and reduce the spread between the interbank rate and the parallel market rate.
Citing the CBN-led Prof. Chukwuma Soludo era, he said increased dollar sales to BDCs led to drastic reduction in the spread between the official and parallel market rates to about N2/$.
“Given that there is no longer an official exchange rate, what the CBN is considering may be to allow the BDCs buy from the banks and resell to their customers who need minimal dollar cash for personal and business travel allowances. It will certainly improve supply in that market and reduce the current premium of about N70/$ between the interbank rate and the parallel market rate,” he added.
For a currency expert and Research Analyst at FXTM, Lukman Otunuga there was a strong feeling of positivity dispersed across the economy in June following the unexpected decision to de-peg the Naira against the dollar in an effort to ease the severe pressures on external reserves and foreign exchange supply shortages.
For an extended period, depressed oil prices have weathered the nation’s government revenues, while supply disruptions heightened concerns over a potential slowdown in domestic economic momentum.
“With fears elevated that Nigeria could enter a potential technical recession in second quarter, the swift decision taken by CBN consequently boosted investor sentiment.
“Unfortunately, the policy faces noticeable pressure now, following the fading optimism over the effectiveness of the Naira de-peg and such has created unease throughout the Nigerian economy.
“However, while it was expected that the Naira should depreciate heavily post de-peg as the natural forces of supply and demand create an equilibrium price, it really does not reflect on the official exchange that showed N281 against the dollar.
“Although there are fears that a weakening Naira could drive inflation higher in the short term, this same weak Naira could attract foreign investments while boosting demand for domestically created products.
“The decision taken by the central bank to float the Nigeria may have been a painful move in the short term, but this could be the first critical steps needed to steer away from oil reliance, while also promoting economic stability in the long term.
“Naira weakening on the parallel markets cannot all be put on CBN alone. Global instabilities have exposed the Nigerian economy to downside risks while the awful mixture of depressed oil prices and a firming dollar will translate back to a vulnerable Naira.
“With liquidity still lacking, coupled with the 41 banned items, which cannot be purchased on the official exchange, market participants will be naturally attracted to the black markets,” he said.
Also, the Executive Director, Investment Finance, BGL Capital Limited, Olufemi Ademola, assessed the new policy as going in the right direction as expected.
The implementation of the flexible exchange rate policy is going on very well. As expected the level of the demand in the market is driving the exchange rate rather than the CBN fixing the prices.
However, it appears that the CBN is the only supplier of foreign currency to the market for now and the market is pricing the high demand into the rates.
“If you check the bids submitted to the CBN by banks on the first day of trading, some were as high as N382/US$. This is based on the request of the customers (since they are requested by banks to state the price in their bid instruction) who just want the foreign currency to complete their transactions.
“With the clearing of the backlog of forex demand and the introduction of forward contracts and futures market, it is expected that going forward, future demand would be lower and even over the period as artificial demands and speculative activities moderate significantly.
“Therefore, as more forex supplies enter the market from International Oil Companies, other exporting companies and foreign investors, the rate is expected to moderate in the very near future.
“The continued ban of some 41 products from accessing the interbank forex market will continue to create opportunities for black market and account for a large amount of forex transactions.
“Additionally, the difficulty in accessing the interbank market by end users, especially retail and individuals due to the stringent requirements for accessing the market otherwise, is leading to the continued patronage of the black market by the end users. These are making the efforts of the CBN to appear futile,” he said.
Still, he said BDCs need to be accommodated and given a role to play, otherwise they will continue to trade outside of the official market and keep the parallel market significantly active.
“The consideration to engage the BDCs for forex trading was a good one, which need not be politically motivated by big economic players or any other persons for that matter. It should be a rational economic decision with a view to make the foreign exchange policy successful,” he added
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