Naira Sees Unofficial Devaluation after CBN Ends FX Supply to BDCs
Nigeria’s local currency, naira, sees an unofficial devaluation in the black market on Wednesday, barely 24 hours after the Central Bank of Nigeria (CBN) cut off dollar supply to Bureau De Change (BDCs) amidst allegations of infractions.
In reaction, the black market reprices the local currency exchange rate to N524 to a dollar from N505 on Tueaday.
Yesterday, the CBN wielded its big sticks on exchange rate bureau operators in the country due to observed infractions. Recall that CBN had in 2016 cut off private exchange operators from the FX supply to consumers.
In the latest development, the monetary policy authority said the bureaux have become conduits for graft and illicit flows of money against anti-money laundering policy for operators.
In their separates reactions, analysts told MarketForces Africa that the CBN decision will have a heavy run on the naira rate in the short term amidst rising demand for the greenback and while the economy remains low on the supply side.
From N505, the local currency was exchanged at N524 across parallel markets while some exchange bureau visited by MarketForces Africa in Lagos lament scarcity of the greenback.
Godwin Emefiele, the CBN Governor, said the bank would channel more foreign exchange to commercial banks for consumers who had legitimate needs, and that it would no longer process or issue new licences for operators of bureaux de change.
Recall that 5 years ago, the central bank banned the sale of dollars to exchange bureaux to avoid depleting Nigeria’s reserves after a sharp drop in oil prices. The move triggered a 60% fall in the currency on the parallel market and a sharp devaluation on the spot market.
The exchange rate has moved from N197 to a dollar at the official market quote to N410 in just six years. However, CBN also admitted at a forum that naira remains overvalued by at least 10%.
This year, the CBN has devalued Naira three times due to covid-19 pandemic hangovers. Dollar inflow into Nigeria has remained below the pre-pandemic period while demand continues to rise.
In May, CBN unified its official exchange rate with the National Autonomous Exchange (NAFEX) rate following its inability to provide dollars for imports, especially in the manufacturing segment.
Despite all its unorthodox foreign exchange policy, including the naira4dollar incentive, a wide gap exists between the official naira exchange rate and the parallel market.
This has caused some high level of arbitrage activities as spreads crossed 20% and round-tripping among BDCs became prevalent.
”In the short-term, we expect the new development to lead to further pressure on the exchange rate in the parallel market given the lag between commercial banks settling to adjust to the CBN’s directive and knee jerk reaction from market participants induced by the urge to stockpile the greenback to mitigate an expected exchange rate pressure.
“Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates”, Cordros Capital said in a research report.
Read Also: Naira Remains Resilient as CBN Sets to Resume FX Sales to BDCs
Naira Sees Unofficial Devaluation after CBN Ends FX Supply to BDCs
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