CBN Moves to Converge FX Rates to Raise Average Price Level
The Central Bank of Nigeria moves to achieve convergence in the foreign exchange market will raise headline inflation, FSDH has said.
FSDH stated in the macroeconomic note said in early July, the CBN adjusted exchange rate in the Secondary Market Intervention Sales (SMIS).
This is a window where importers access foreign currencies, adjusted from ₦360/$1 to ₦380/$1.
Part of the monetary measures to support the economy is the unification of exchange rates.
The objective of which is to maximise naira returns to Federal Account Allocation Committee from foreign exchange inflows, as contained in the Economic Sustainability Plan (ESP), which was launched in June as government’s response to the COVID-19 pandemic,
“This is expected to be implemented in the first 12 months, according to the ESP.
FSDH said the recent move, therefore, to unify the exchange rate is in line with the government’s agenda as well as with demands for multilateral agencies who are heavy lenders to the government.
Meanwhile, the IMF and World Bank had requested for a unified and flexible exchange rate from the monetary authority as Nigeria secured foreign loans from both institutions.
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This upward adjustment of the Naira is expected to have positive implications on government revenue and in turn, reduce pressure on the exchange rate in the short term.
However, other markets are expected to adjust accordingly- the move would translate to higher pressures in other markets like the parallel market, raising speculative concerns in coming months.
With the Reserves at US$36 billion and relatively stable oil price, FSDH said there appears to be a considerable amount of firepower to intervene in the markets.
However, as economic activities improve, higher imports and lower foreign investment inflows relative to 2019 will add pressure on the reserves.
Despite the adjustments, the CBN will continue to intervene to maintain exchange rate stability and prevent large FX fluctuations.
“The move is also expected to trigger a marginal increase in inflation rate, particularly imported food inflation”, FSDH explained.
CBN Moves to Converge FX Rates to Raise Average Price Level
