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Tuesday, September 14, 2021 / 1:46 p.m. / by CSL Research / Header image credit: AZA Finance
In recent weeks, strong pressure has been on the exchange rate in the parallel market following the policy of the Central Bank of Nigeria (CBN) to halt the supply of foreign currency to exchange bureau operators (BDCs). As a result, the premium between the parallel market rate and the rate of the Investors & Exporters (I&E) window has steadily increased. Since the last Monetary Policy Committee (MPC) meeting in which the decision was made, the Naira in the parallel market had depreciated 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 fallen to 33%, compared to 23% when the policy was taken out on July 27, 2021.
While the action of the CBN seems justified on the basis of the illicit financial behavior of the BDC operators, we believe that the timing of the ban (summer period: June-August) is inappropriate. The summer period is characterized by pent-up demand for foreign currency to meet the needs of personal travel and education. Although the umbrella bank has redirected the supply of foreign currency previously intended for BDCs to commercial banks, the restrictions on the limit on demand for foreign currency imposed by banks on customers have not changed and the requirements for accessing foreign currency have not changed. banks can be daunting for some.
As such, clients have resorted to parallel market currencies, pushing exchange rates to new levels. In addition, in the current situation, the inputs of the Naira 4 Dollars program aimed at increasing liquidity in the parallel market may not have a significant impact. In addition, the inability of REITs to obtain foreign currency for repatriation has blocked inflows of foreign wallets, a major source of dollars in the economy.
In our opinion, we understand that the policy objective may be to track all foreign exchange claims in the market, but this has not helped to alleviate foreign exchange demand pressures. In 2016, when the CBN took similar action, it yielded limited results, with the parallel market premium estimated at 61% at year-end. That said, we expect the liquidity of the planned issuance of US $ 3.0 billion Eurobonds and US $ 3.4 billion Special Drawing Rights (SDRs) to increase the liquidity of currencies. So, we don’t expect a devaluation this year.
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